Brent crude likely to trade in $95-100 range: Azlin Ahmad

International crude oil prices on Monday fell unexpectedly due to concerns over falling global demand due to economic uncertainty in Europe and US. While Brent crude fell about USD 2 per barrel, US crude went below USD 96 a barrel. Unemployment data from Europe and the slowdown in the US manufacturing sector also stimulated the decline in oil prices.

In an interview with CNBC-TV18, Azlin Ahmad, Editor, Crude Oil, Argus Media said that fears of EU sanctions against Iranian crude will keep prices towards USD 100 level. He also does not expect Brent crude to correct to USD 80 levels even in a worse case scenario. It is likely to trade between USD 95-100 per barrel, opined Ahmad.
Besides, Ahmad said, the European Union sanction restrictions on insurance for tankers carrying Iranian crude is also keeping prices elevated. Further, he expects the current WTI-Brent curde spread to narrow down. Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video. Q: Do you think that Brent crude is possibly going to sustain below USD 100 for the remaining part of 2012 and what sort of upside risks would you be working with?
A: I think for now obviously the threats from Iran to close the Strait of Hormuz and then the Norwegian oil strike has pushed Brent prices up to the high 90s. Further, going into the third quarter, when oil demand traditionally increases and if the Iran sanctions do hit a lot, there is a possibility that Brent may hover around the high 90s or maybe around the low 100s.
But, right now, there are a lot of uncertain factors and primarily with what's happening to the euro zone debt crisis, I think it's going to still put a cap on oil prices. Q: What would that cap be? Would that be USD 100? Where is the likely average for crude in the next two months given the very, very poor growth data that we are getting from most of the developed and eastern countries as well?
A: I think that it's unlikely that Brent will fall below USD 80. If it does, the OPEC nations will do something and Saudi Arabia will probably drastically cut production. Q: You said Brent falling to USD 80. You are not speaking of NYMEX?
A: No, I said it's very unlikely that Brent will fall. But, I think that it could be a very wide range. I don't think that we are going to see Brent prices go up to USD 120, not in the next two months unless some output disruption happens or something happens with Iran. Q: Those two extremes are taken. Those would be the unlikely ones. What is the most likely average? Would it be USD 90-95? Would it be USD 95-100? Would it be 85-90? If you have to pick an average for Brent in the next quarter or in the current quarter, July-September quarter, what would that USD 5 range be?
A: I think it will probably be closer to USD 95-100, but as you know forecasts and predictions do tend to get overridden by what’s happening in the market. But, looking at where the market is and looking at demand, USD 95-100 would probably be a closer range, looking at where the market is. Q: What sort of geopolitical risks is Brent crude factoring in right now? We do understand that the EU sanctions against the Iranian crude are in effect as we speak. Give us a sense in terms of what is the possibility on the geopolitical front or what analysts are talking about and what is factored in at this point?
 
A: Actually the impact is more practical because of the EU sanctions and the fact that extends into insurance for tankers, it has made it a lot more difficult for Asia-Pacific importers of Iranian crude to get insurance for the Iranian cargos. I think that is what the market is watching because that could force a lot of Asian importers to reduce the Iranian volumes and rely more on other grades from Kuwait and Saudi Arabia.
 
We have already seen South Korea announce that it's going to halt Iranian imports basically because of difficulty in getting insurance. It's not so much the geopolitical risks, I think it's more of the political reasons that could put a floor on oil prices, in terms of the EU sanctions.
  Q: You think that factor has not played out and immediately we could see Brent rising because more and more countries will become alive to this practical problem or isn’t all that already priced in?

A: Right now, the implications of it is not fully felt in the oil prices and also in the fundamentals.

Q: What about the spread between Brent and NYMEX at this point in time? Can you give us a sense in terms of where it currently stands?
A: Looking at US oil production, the expectation is that the spread, the discount of WTI to Brent should narrow because the US output is still increasing and at the same time, US is not taking as much of the West African, Mediterranean and Libyan crude asset it took previously. The assumption is that if this continues, it should narrow the spread between Brent and WTI. But I don't have an actual number of what that is going to be for the rest of the year. Q: Do you track gas prices? They have also been falling continuously. Is there any average that you are looking at? Will there be further falls or do they stabilize at current levels?
A: We don't look so much at gas. But I think it's just that obviously the gas prices are falling. But, outside of US, even though gas is a lot cheaper you cannot substitute for utilities. Even in places like Japan, there is only a limit of gas that you can use. I think while that is a factor, it's not going to have a big impact on where the oil prices are going to be, at least in the next quarter or half year.