Geopolitical premium is probably why oil prices are up

Post the signalling of the end of QE, there has been huge movement in commodity prices, including gold, and currencies as well, says Daniel Morgan, Global Commodity Analyst at UBS.

UBS has turned bearish on gold and has moved to downgrade the yellow metal forecast. In the next 12 months, he is expecting some stabilisation via physical demand, but a continued decline in price can take it towards long-term level of USD 1,100 per ounce, from current below USD 1,300 per ounce. Daniel Morgan was expecting a weaker crude, but believes it might be holding up on geopolitical premium, such as the tensions in the Middle East, Sudan and south Sudan. However, long term, crude prices may go down on high supply coming in the next few years and growth in oil demand not catching up. In the short-term, speculative trade flows will exit the commodities market, particularly in exchange traded commodities and the LME metals. Also Read: Gold below $1250/oz may shut down mines: Scotia Moccata Below is the edited transcript of Daniel Morgan's interview with CNBC-TV18 Q: What would you say could be the next direction that crude prices could take because that is the one commodity that’s been relatively stable through this period of carnage? A: Commodity prices have had huge moves in the past 24-48 hours and currencies as well. The signaling of the end of quantitative easing (QE) by the US Federal Reserve has caused a huge rupture in the financial market. Gold has seen huge moves in the past 24 hours and as a result of impending end of QE,. we have moved our gold forecast to downgrade. Therefore, we have turned bearish towards gold as a result of these moves. Q: What kind of price levels are you targeting now post the downgrade for gold and silver? A: Spot prices fell over 7 percent last night and sitting below USD 1,300 per ounce is a bit of a liquidation manoeuvre. So, in the next 12 months we are looking for some stabilisation, maybe some physical demand to help the price, but then a continued decline in price (may push it) towards long-term level of USD 1,100 per ounce. The key case for gold is a hedge against inflation and the risk of inflation has significantly deteriorated in the last 24 hours. So, we are not advising people to hold a lot of gold in their portfolios as a result. Q: What about crude? That’s been stubbornly stuck in USD 102-105 per bbl range despite some weak economic indicators from markets like China. Do you see it correcting or it being a relative out performer in the commodity basket? A: Crude has been stubbornly high and given the moves in other exchange traded commodities linked to QE; I would have thought that it might be little bit weaker. One of the reasons that we think crude might be holding up is a geopolitical premium. So, tensions in the Middle East that is ever present and in serious situation in other regions in the Middle East like Sudan and south Sudan, these are the things that are causing the stability. So, the geopolitical premium is probably the reason why oil prices are holding up. However, fundamentally, if you are looking towards longer-term trends then there is a lot more supply coming on in the next few years and economic growth hasn’t brought through a big demand driver for oil. So, I would still expect prices to be weaker and go below USD 100 per bbl in the next couple of years. Q: There hasn’t been too much chatter about what happens to the industrials though, particularly given what the Fed had to say about growth improving. What would you say could be the outlook for some of these industrial metals going ahead? A: In the short-term, you are going to see speculative trade flows exit the commodity space and so you are going to have some very volatile moves in the short-term and that is going to be most particularly in exchange traded commodities, the London Metal Exchange (LME) metals, things like gold and crude oil, although, have not seen that. Coal and iron ore should be a bit more insulated because they tend to be end market commodities where it’s direct transactions between consumers and suppliers of commodities. So, that is probably going to be less impacted by these QE moves. However, ultimately we shouldn’t move too far away from fundamental. Why the US Federal Reserve changed their stance towards QE? It’s the US economy; it is starting to recover from its anemic growth levels and this is going to be a good thing for the global economy and will put it on a sure footing and eventually will help demand for commodities, particularly in the metal space, copper and aluminium and nickel.