Brent may stay around $100/bbl in near-term: UBS Equities

Overnight, along with the big global equity rally, many commodities snapped back as well. Brent crude rallied above USD 100 a barrel while gold jumped over 1% after talks that major central banks would act to bolster a slowing global economy. 

Tom Price, global commodity analyst, UBS Equities Research gives his views on where specific commodities like Brent crude and gold are headed in the near to medium-term.

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

Q: The market has been most fixated on is the move on crude. How did you read that ride back to above USD 100? What do you think of the near-term targets may be for crude given how much it has moved through this week?

A: The snap back of oil has terminated several days of sell down across both Brent and WTI. But now that we are at these relative flows, I think we are just going to see a bit of volatility in oil. Now the spot prices are actually trading below our forecasts for this year so we are sort of thinking USD 110 a barrel for Brent and probably about a USD 100 a barrel for WTI over the next six to 12 months.

Q: What’s your sense of what’s happening in the medium-term because opinion seems split about whether this is the much expected cut in commodities or whether this is just an effect of what’s happening with risk levels globally and crude will bounce back right at the moment when equities do?

A: If you actually look at the differences between equity indices and equity markets and commodity markets, equities generally lead commodity markets up and down. There is generally about a two-three months lag in commodity markets. This is what I have noticed over the last decade or so and equity markets have led commodity markets over the last two quarters.

So my expectation is that both markets would probably stay at current levels now. The features of the oil markets are very high inventories across Europe in particularly the US, they are sitting on very high inventories in the WTI. There is not much happening in demand growth oil. So the prices seem to be at their marginal cost of production at the moment.

What probably might be undermining it right now is that OPEC is probably delivering a little bit more than they need to. So they have got probably excess production rights at the moment. They are probably preparing for more sanctions for Iran over the second half. So there are a lot of things that are weighing on oil prices and it is probably trading at relative lows at this stage.

It’s June and right now, what I normally do is I look at where spot prices are now versus start of the year. It is kind of interesting watching the disparity between commodity markets and equities. There are actually only four commodities which have sold down very heavily since the start of the year and the rest of them have traded sideways.

Nickel, oil and gas are the ones that have come off 10-15% and in thermal coal’s case - 20% since the start of the year. All the other commodities have pretty much traded sideways. So the fundamentals look generally well supported. In an equity world, everyone’s macro punting at the moment.

Q: How active is hedge fund activity in some of these commodities at this point? How much of this is in effect of the liquidity moves and how much the fundamental issues that you pointed out?

A: I do talk to hedge funds but I find it very difficult to actually quantify how much exposure hedge funds are having in the commodity world. Tthe only place it can formally measure it is on the Commodity Futures Trading Commission (CFTC) platform in the US. That actually split it into non-commercial and commercial. It is interesting how the speculative non-commercial component has been net-long for several years in commodities like copper, gold and oil. They pulled back to neutral.

It just highlights the fundamentals point with hedge funds. They may influence the market at the top and the bottom of the cycle but I generally have to follow the fundamentals like everyone else and they are uncertain at the moment - that’s certainly the feedback that I am getting from my clients.

Q: A word on gold as well and whether you think what’s happening right now is a temporary phenomenon because of the uncertainty globally or do you think gold is coming back into the game?

A: It is interesting watching gold’s movements over the last couple of months. There is a lot of confusion, gold being sold down with every other commodity. A very popular question is - Hey Tom, I thought it was the safe haven, then why is it being sold down? But if you have got a weak global economic outlook, gold gets sold down too because people are trying to liquidate positions and gold is being used to fund losses elsewhere. So that’s part of the reason.

But it has had a bit of a recovery in the last couple of days. I suspect that relates to the Greek elections. It has focused the markets mind on the inflation risks around what might come out of the Greek elections. Any risk or fear about inflation is generally good for gold. So it might have a good time over the next week or so.