Expect Brent crude price to touch $110/bbl: UBS

Tom Price, global commodity analyst at UBS expects Brent crude prices to inch upwards to USD 110 per barrel from USD 107 per barrel currently. 

He says the price rise will be due to higher consumption rates. "This price rise in Brent will continue for couple of months in the third quarter. However, September-October might be a period of weakness," he told CNBC-TV18.

Also read: Oil looks 'overbought' as Brent bears USD 110

Below is the verbatim transcript of his interview to CNBC-TV18

Q: What’s your call on crude now? We have seen quite a bit of search over last few days especially in the WTI crude. Do you expect it to settle back to say USD 100 per barrel or will this upward surge is going to continue?

A: I was actually in the United States (US) a few days ago and there was a lot of excitement about the WTI going above USD 100 barrel. It is actually a geopolitical factor but there is a fundamental factor there too. We have seen inventories come off. I think they are in the high 380’s in the US. They have come off about three-four million barrels just in the last couple of days.

So, the fall in inventories is supportive. There are head high inventories for quite a while and I think that’s a focus of attention. However, we have got dramas across the Middle East so Egypt is the point of focus at the moment but Libya, Iran and Syria have all contributed to creating some supply shocks. Over Central Africa and Sudan we have seen some issues there.

My view on supply side events like that is they tend to be fleeting, just brief events that can be supportive for prices, for something more sustained, the demand growth driver and we see some emerging in the US. However, I think that’s probably been offset by China at the moment.

Q: What could the upside be for Brent crude now? It has already touched that USD 108 per barrel. In the near term, what are you forecasting?

A: Like many commodities, there is a seasonal element to trade flows, consumption and the price signals and I have been a fishery of Brent at the moment. Going into third quarter, you tend to be at the high end of consumption rates and we are expecting a lift in consumption rates for this year.

We are thinking globally about three million barrels per day versus a steady state of just under one million so that’s quite a strong lift. We are thinking of a price for Brent is about USD 110 per barrel, so a little bit above where it is at the moment and that should continue for couple of months into Q3.

September-October might be a period of weakness though. So, you have probably got another one month, maybe two of happiness and upside for Brent.

Q: What about gold? Is this just the dead cat bounce that we have seen, this week’s rally? Do you expect it to go back to sub USD 1,200 per ounce or do you think there is some floor now for gold prices?

A: UBS has been extremely bullish on gold over the past 12-24 months. At one point we were thinking USD 2,000 per ounce, but we have flat out cutting and trying to catch up for the falling gold price for most of this year. We actually published today our current forecast.

We are basically sticking with our long term price of USD 1,100 per ounce for real, so it is about USD 1,200 per ounce where it comes in, our price take out of 2016-2017. So, we are pretty close to that level and we have got a very boring flat forecast. It is up to USD 1,250 per ounce given our price forecast and what we think of the key drivers.

I think there is downside risk. Dead cat bounce sounds a bit severe but the sorts of things that we worry about is the lack of inflation, gold really does need an inflation driver. Safe haven issues, I don’t think anyone really believes there is a crisis anywhere in the world at the moment so that’s probably past and probably another consumer which relates to inflation is a strong and improving US dollar and more economic activity in the US.

All these things are negative for gold. So I say the risk at USD 1,245-1,250 per ounce is probably to the downside. A very good signal to follow is if it gets low and the exchange rates don’t move fast enough, you start seeing minus in Australia, South Africa - those major centres starting to cut productions because right now they are in a lot of pain at the moment. They can’t quite cut their costs fast enough and I think we might see some production cuts come through.