Brent to hang around USD 100/bbl in near-term: UBS Equities

Brent crude remained above USD 93 a barrel on Thursday after rallying over upbeat US economic data. Gains, however, were checked by expectations that the EU summit which will take place later today was unlikely to produce concrete measures to contain the region's debt crisis.

Tom Price, global commodity analyst, UBS Equities Research expects Brent to hover around USD 100 a barrel levels in the near-term. In the second half of FY13, he sees an upside risk to crude.

Below is an edited transcript of his interview to CNBC-TV18. Watch the accompanying video for more.

Q: Do you see the price of Brent collapsing more or do you think USD 89-90 a barrel is the floor for now?

A: I think that is a floor for now. The risk is probably to the upside at these levels. There are probably two major drivers there for Brent - we have gone slightly above what’s necessary in terms of production rates by OPEC and of course you got a weak economic growth outlook there.

But given OPEC’s capacity to rebalance the trade in the short-term, I don’t think the price is going to go much below current levels. So probably think about USD 90 to USD 105-110 through the second half of this year which is what we are thinking at UBS.

Q: A lot of people have started talking about much lower levels because of the weak economic data which are coming in from the US, Europe remaining in a mess, China is scaling down targets. Do you think all of this, coupled with the fact that the risk premium is coming out of the crude market might actually lead it to a lower range than what you are predicting for the second half?

A: If it was a genuine fair trade, we would have seen a much deeper correction long before now. It just looks like a more measured sell-down in the oil price. At UBS we have done some research on the fundamental view on the price. We think there is a stable floor at about USD 70-80 a barrel and we are kind of there already.

I would say on the cost of production, we are just USD 5-10 above that for Brent. On a cost basis alone and it’s in a way we sort of look at it across all commodities. The risk is to the upside. I don’t think we are going to see a massive correction from these levels.

Q: What happened to the war premium? Is that completely out with the correction that we have seen in crude prices or is that still baked into the price?

A: The big lift in OPEC production and our calculation show that probably 2 to 3 million barrels above what’s required on a daily basis has kind of taken the steam out of the oil price. Then on top of that you have got concerns about economic activity, both of those will weigh on the price in the short-term.

Q: There has been quite a knock off in agri commodities as well. Is there anything you track there and do you expect to see a significant demand-supply situation with?

A: Commodities isn’t an area that I actually look at, but base metals and precious metals and bulks is something I look at all the time. We are talking about oil coming down towards marginal cost production. We have actually seen that across all of those bulks and metal spaces as well. Aluminum, zinc, nickel, they are all trading at or below their marginal cost production. Thermal coals reported a very large correction just in the last couple of months. We have got surpluses of coal right across Asia and Europe. We have seen thermal coal prices across Asia go below their marginal cost of production.

The only commodities with prices well above the marginal cost production are those with some sort of constraint in trade. Metallurgical coal, there is a strike event happening in Australia that has kept that artificially high. On copper there is probably an underperforming mine supply across South America and to some extent Africa which has kept copper’s price well above the marginal cost of production. But for most commodities, they are at or below the marginal cost of production. They are at relative lows.

Q: How likely is it that gold remains a preferred pick in the second half or do you think the best of that rally is probably behind us?

A: I am a short and medium-term goal bear. It’s a funny metal. If you are really worried about inflation in the world at the moment then gold is a great place to go to, but who is. We have got underperforming economies in Europe. Everyone’s concerned about not so much inflation but economic activity declining. If you have got to pull away from commodities you would probably sell your gold to cover losses elsewhere and I think that’s the sort of thing that has been going on.

The other concern for gold is you have got a relatively robust US currency and that seems to be showing a trend lift which is really a relative call.  A weaker Europe means that the US currency is probably going to strengthen on a relative basis and any lift in the US currency is bad for gold. So no inflation, a rising US dollar, gold is not a good place to be.