Jul 24, 2012, 10.45 AM IST | Source: CNBC-TV18

Crude to trade in $90-105 range: IHS Global Insight

Simon Wardell, crude and geopolitical specialist, director, IHS Global Insight, says that it appears that Syria political situation is moving closer to a resolution as the regime is weakening. Saudi Arabia is producing more than they had ever produced in the past so one can’t expect more from OPEC states.

Simon Wardell, crude and geopolitical specialist, director, IHS Global Insight, says that it appears that Syria political situation is moving closer to a resolution as the regime is weakening. Saudi Arabia is producing more than they had ever produced in the past, so one can't expect more from OPEC states.

We expect the Brent prices to trade in a band of USD 90- 105, based on whether the market is concerned with the global economy or with the supply issues. I don't expect situation in Iran will be resolved in coming weeks. So, we would anticipate the supply concerns to be present this as well as next year.

Below is the edited transcript of his interview to CNBC-TV18.

Q: What is your view on Syria and about the recent attack and where do you think Syria is headed?

A: It appears that Syria political situation is moving closer to a resolution as the regime is weakening. With event occurring in the last few months it is difficult to predict exactly when these turning points occur and what significance these events might have. A resolution is sight will help to stabilize some concerns over what is politically happening in the Middle East. These are the key elements that are driving crude prices up.

Q: We have seen some heightening of tensions, attack on Israel tourist bus in Bulgaria, sanctions kick in against Iran by both the US and the European. What is your view on crude from both geopolitical and supply point of view?

A: Supply is quite tight. Even though we have these concerns over the state of global economy, the Iran situation and the sanctions which strongly began to head in July with the actual embargo at self taking effect has reduced the supply volume from market.

Difficultly of getting insurance for shipping is hitting exports to Asia and Europe. So exports from Iran are down and that is tightening the global balance. Saudi Arabia is producing at high levels and Iraq is also producing some extra oil. Currently, the oil present in the market is very much equal to the demand but it is tight. Certainly, the tensions with Iran continue to play in the background as an ongoing supply risk.

Q: What is the reason for the run up in crude prices in the last few weeks?

A: The markets are in the push and pull between concerns over the global economy and concerns over supply. Beginning July, we have seen supply concerns mounting likening direct coming from Iran are the factors rising crude prices.

The European Union's effort to try and stabilize worries in Spain and Italy had a small positive impact on the market which raised optimism. Combination of both the factors led to rebounding of crude prices. But what's been happening with the price rebounding back up is that it is adding some more confidence in the economy combined with concerns over supply. That may be ebbing as we reach July end.

Q: How further up or low crude price could go? How much are you assessing is the geopolitical premium that's built into the current price and how much of the price is linked to fundamental demand-supply issues?

A: It's very difficult to put values on it; a good proportion of the price is fundamentally driven right now because we do have limited supply spare capacity coming from OPEC.

Saudi Arabia is producing more than they had ever produced in the past so one can't expect more from OPEC states.

The concerns over Iran may see a disruption is heightened because it becomes very difficult to compensate for any potential outage as risks of that outage increase.

I think it's very hard to argue at how many dollars and cents the crude price might be, and how much is specifically fundamentally driven and geopolitically driven. Right now we have tight supply-demand balance which is not going to ease immediately unless we either have a very severe economic recession or a massive jump in supply which we are not expecting at the moment.

Q: Do you think prices will consolidate around these levels and maybe move up a little bit but they are unlikely to go do down?

A: We expect the Brent prices to trade in a band of USD 90- 105, based on whether the market is concerned with the global economy or with the supply issues.

I don't expect situation in Iran will be resolved in coming weeks. So, we would anticipate the supply concerns to be present this as well as next year. We are not expecting either a complete capitulation in the global economy and something akin to what we had in 2008 with the Lehman Brothers collapse which sparked a very sharp drop in demand as we hit a global recession. So if one don't expect a global recession similar to the level of 2008 or supply concern then I think Brent to move in USD 90-105 level.

We may see prices to ease off a little in next year when we get additional supply and not huge amount of demand growth either. So, I think the market will remain volatile in next six months probably without too much of a move up or down unless of course we have a real problem in the Middle East, Gulf.

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