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Jul 12, 2012, 08.23 AM IST
Praveen Kumar, senior consultant, head-South Asia Oil and Gas Team, FACTS Global Energy sees a downside pressure on crude prices from here on.
In an interview to CNBC-TV18 Praveen Kumar, senior consultant, head-South Asia Oil and Gas Team, FACTS Global Energy shared outlook on what is driving crude oil prices and where he sees it heading going ahead.
The volatility seen in crude oil prices is due to imposition of US, EU sanctions on Iran, he said.
However, he sees a downside pressure on crude prices from here on. "That’s because of two reasons. One is that the market has started to get a little more relaxed about the whole geopolitical issues on the Iran front. Also, markets are oversupplied and there is a growing realization that there is an increasing amount of crude oil that’s going into storage,” he elaborated.
For the near term he sees crude prices hovering in the band of USD 90-100 per barrel . However, he doesn’t see crude prices heading higher from the current levels.
"For 2012 as a whole we see Brent averaging about USD 108 per barrel. For Q3 which is this upcoming quarter from July to September - we see it at about USD 101 per barrel for Brent and Q4 about USD 103 per barrel," he elaborated.
Below is the edited transcript of Kumar's interview with CNBC-TV18. Also watch the accompanying video.
Q: Is this all just a terror premium or the geopolitical risk premium coming in or is something else driving prices through the last few days?
A: To be honest, we see a downside pressure on crude prices from here on. That’s because of two reasons. One is that the market has started to get a little more relaxed about the whole geopolitical issues on the Iran front. Second is because of the whole economic outlook that’s happening in the EU scenario, which has started to pan into the Asian markets. The third reason is also that the markets are oversupplied and there is a growing realization that there is an increasing amount of crude oil that’s going into storage.
The volatility was always anticipated because from July 1st onwards that’s when the real EU and the US sanctions would kick in. We knew that the EU would take away the insurance on vessels that would come in from Iran. So, that volatility was always expected. The reality here is that there is a flow that will be set here which is about USD 90 per barrel.
Saudi’s are producing about 10 million barrels per day of crude. As long as they are producing that much, there is going to be a lot of crude that’s going into storage. So, unless they really cut down the supply which will probably happen at prices below USD 90 per barrel for Brent. We don’t see crude prices going up from here. So, if you were to trust our forecast, we think Q3 calendar year, crude will be about USD 101, Q4 - it will average at about USD 103 per barrel for Brent.
Q: What exactly has happened in last couple of days then, is it tremendous fund activity that has gotten back into the market because the charge has been quite furious in just two or three trading sessions?
A: July 1st was the date when the EU sanctions would kick in and basically EU would completely stop importing any kind of crude from Iran. Iran’s crude exports have dropped from about 2.3 million barrels per day and that’s dropped by half.
So, it has become about 1-1.3 million barrels per day. We think there is a potential for it to go down further. But the key thing here is now the EU insurance companies will no longer ensure vessels that charter crude from Iran or products from Iran and that is the problem.
Therefore there is a risk premium right now in the market that has suddenly started coming in. But if you see the build up over the last couple of weeks, we were seeing crude prices starting to come down because the markets have realised that there is enough crude in storage. Also they had started to get all relaxed about the escalating tensions from Iran.
So, now Iran has come back into the news, threaten to do something about the Strait of Hormuz, there is this insurance issue because of these two main reasons crude prices have spiked again. But like I said, there is enough crude in the market, there is enough crude in storage. From here on there is more of downward pressure on crude prices than it going significantly up.
Q: When you talk about downward potential, what kind of downside risk do you see for crude and in the near term what kind of range do you think we are talking about?
A: If you look at it, the flow will be set by OPEC and that’s mainly Saudi Arabia. We see it at about USD 90 per barrel for Brent and USD 100 is where we see the ceiling roughly for President Obama to get re-elected essentially. So, we think a band of USD 90-100 per barrel is where we see that sort of crude price fluctuating.
If it goes significantly below USD 90 per barrel, we think Saudi’s will step in. They will reduce the production from what they are producing right now which is about 10 million barrels per day. The lowest they will probably go to is 8.5 million barrels per day and that would straight away take off about 1.5 million barrels per day of crude from the market. If it goes significantly above USD 100 per barrel then I think the OPEC will again take a call on the production. So, I think the band is USD 90-100.
Q: That would be your medium term target as well?
A: Yes, for the year, for 2012 as a whole we see Brent averaging about USD 108 per barrel. I think Q3 which is this upcoming quarter from July to September - we see it at about USD 101 per barrel for Brent and Q4 about USD 103 per barrel.
For 2013, we see prices going further down from where they are right now because that risk premium which we have seen throughout this year will start to go away. We think Iran will start to slowly buckle under pressure here.
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