March crude at USD 55-60/bbl: Swiss America Trading

Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS Yesterday’s spillover may continue Warm weather impacts crude prices Waiting for mkts to make a decisive move Crude hovers around USD 56/bbl Buy oil mktg firms, airlines: First Global BSE | NSE 10/02/12

Crude prices plunged below USD 52. Fuel use dropped 4% last week as mild weather curbed heating-oil use. CEO of Swiss America Trading and author of 'Black Gold Stranglehold,' Craig R Smith, shares his outlook on where crude prices are headed.

 

He sees crude at USD 55-60/bbl by March 2007. However, he says that crude could go to USD 60-60/bbl, if there is violence in Iran and Nigeria.

 

He feels that there are too many geopolitical risks to keep oil at lower levels

 

Excerpts from CNBC-TV18's exclusive interview with Smith:

 

Q: What do you see as the few next weeks in terms of how this market is going to move?

A: Today I am not as bearish as many in the US are about the oil market at this moment. I think there are way too many geopolitical risks still out there that could easily influence this market on the upside and of course the one that first comes to mind is the potential of the recently announced OPEC cuts. If you ever followed OPECs' logic and their follow through, they have announced, it takes few months for member nations to come under compliance. The announced cut of 1.7 million barrels will be fully implemented by February 1 and will be very bullish for the market.

Q: The demand-supply factors at least for the near term seem to be loaded against crude, inventory seems high and demand seems to be sluggish. By what time do you think these equations will even out?

A: I think the supply and demand is one issue and obviously the demand has settled down somewhat with the recent changes of weather in the largest consumer of oil in the world that is the United States. But I think that can be very short lived from what the forecasters are saying for the rest of the winter. But I am more concerned about the supply side from the geopolitical standpoint.

The recent events in Iran and the threat that it poses of potentially causing problems in Straits of Hormuz could have a very detrimental impact on the prices of oil to the upside. I think that when you look at the Strait of Hormuz, 90% of Japan's oil comes from there, 60% of Europe's, about 25.5% of the United States. When you couple that with the problems we are having in Nigeria - with the movement for emancipation of the Niger Delta and the militants trying to take over oil facilities there, I just think there are way too many geopolitical risks that are out there right now to the supply-side of the equation.

To assume that we are going to see oil stay in this USD 50-55 trading range is optimistic and I wish I could be like those who believe that is the case; many are saying that now the terror premium is out of the oil, which will see prices settle down. I just think it is being very optimistic given all the geopolitical events that can unfold with just two headlines in the newspapers tomorrow.

Q: On the upside how much do you see crude recovering by the next one or two months?

A: Again it is going to depend on how these events take place. I am very pessimistic about Iran, which sounds a little bit reactionary but you got to keep in mind - Iran has the fourth-largest amount of sea mines out there next to China. It wouldn't surprise me to see them threaten to miners Strait of Hormuz, which could create chaos overnight. I suspect if minor events, something not to that levels occur you will probably see oil between USD 55-60 a barrel by March. If we were to see Iran make moves like that or further escalation of the problems in Nigeria, I think USD 60-63 a barrel are very legitimate by the middle to the end of March.

Q: Where would you call the bottom for crude right now?

A: I think the equilibrium price it depends on who you ask, Dr. Michael believes that it is at USD 40, while I to believe it is at 45. I think I can make the case that below 45 on oil is going to be very difficult to extract; the oil from some of the new finds, the deep sea drilling that we have in the Gulf, Trico today announced cut backs, Hornbeck Marine Services' stock dropped dramatically today on the whole potentially on news that they are shutting production at these lower prices. So I must tell you I think the equilibrium price of oil is USD 45 a barrel, I don't think you are going to see that hit and will be very shocked if you did and let the cuts and all these geopolitical events.

I would play this market more on the upside than I would on the downside. I am probably a contrarian right now in that area but I just don't see the geo-political climate settling down such as to make myself comfortable enough to tell people to stay short with oil here.