Fat Prophets: Brent crude can test $90/bbl in future

Weak economic data from the US and China saw Brent crude prices fall to a 16-month low, below USD 98 a barrel, on Monday. Pressured by fears of a global economic slowdown, Brent crude for July delivery dropped more than USD 1 to an intraday low of USD 97.06, the lowest since January 2011.

Voicing the same concern is David Lennox of Fat Prophets. In an interview to CNBC-TV18, he says this bearish sentiment sweeping across markets along with the price correction in Brent crude prices is the result of a slowdown from China, to Europe to the United States.
In May, both Brent and US crude posted their biggest monthly losses since late 2008, as traders focussed on the potential disruption of Iranian oil supplies due to Western sanctions against Tehran was countered by the wider economic concerns.
Suggesting that the risk still is on the downside, Lennox sees Brent crude testing USD 90 a barrel levels in the future. Below is an edited transcript of his interview. Watch the accompanying video for more. Q: It’s been a significant correction for Brent crude since high of USD 128 per bbl in March. Do you think below USD 100 per bbl mark that we have touched right now is just an aberration or do you think it’s sustainable?
A: We certainly think at the moment it’s probably a relatively sustainable price. We do think when you look at the global economies as we see them today the main users of petroleum products in the US; its economy is very lame. The euro zone which is the biggest regional user - its economy is in fact probably dead. China which is the second biggest user of petroleum products its economy we know is slowing.
It is not that these three scenarios together haven’t been around now for some time, when you add them together it does certainly put a pressure on the demand side to possibly go lower. With that we would expect that prices will probably go lower as well. Q: One would assume that with this kind of data, a lot of financial investment backing commodities like oil will also start withdrawing. Would there be a disproportionate fall in the prices of crude? What is the bracket you are looking at?
A: We don’t think that the price of crude will fall disproportionately at this point in time. We do think that the market has probably got enough education to it in terms of what has been happening to adjust their financial positions in whether or not they are long or short. We would be looking probably at this point in time; in fact our range was somewhat higher than where the current price has fallen to.
So we would be looking for the price of it to probably look between USD 90 a barrel where it is now and possibly just a touch lower. That I think is the real difficult part. We have seen quite a significant amount of volatility in a downward direction and it is just trying to find where that floor will be that I am afraid is a little difficult. So we would be suggesting the risk still is to the downside. Q: Were you speaking about Brent when you said USD 90 a barrel. You expect that to be the approximate average price for the current quarter?
A: We do expect that the risk is still to the downside. We do think that we have now got to see a concerted move by the producing nations of the world to start shutting in production. We cannot see any joy on the demand side for crude to actually want to keep the prices high. We do expect that prices could potentially go lower until we see that concerted effort by producing nations to close in production and the key nations or the key cartel is the OPEC group of nations. Q: Are you factoring in any sort of geopolitical risk on crude at this point?
A: Unfortunately, the nature of the commodity in oil, the nature of the regions in which the bulk of that oil is produced lends itself to geopolitical events, that will unfortunately be the part of pricing aspects of oil, forever on a day. What happens is that traders tend to focus more or less on those events depending on the news. We have seen very little news in terms of geopolitical events over the last month or so.
Hence, the focus has gone away from geopolitical events. But you cannot take that away from the fact that we might wake up tomorrow and some things happen that might push the price of crude significantly higher. I just cannot build those into any prices. Q: Gold is up 4% on overnight basis. Do you think that it’s back on the table to give us heady returns again?
A: The reason we have seen gold rise so quickly was because of the very bad US job figures we saw released on Friday. The magnitude of 69,000 jobs created compared to the consensus figures suddenly had investors rethinking their attitude towards the Federal Reserve actually introducing another quantitative easing round.
 
The Federal Reserve has obviously not stated that’s what it will do but investors are quickly reading into the numbers, the potential for that to happen as we have seen in other quantitative easing - when money is being printed by the US unfortunately values the US dollar and sends the price of gold up. That’s not quite what we think is going to happen going forward.
So we think we will see gold again be quite volatile until such time as the Fed actually comes out and says - yes, we will be doing a further quantitative easing and that’s probably not on the cards just at this point. There is a Fed statement to be made on June 7. We might perhaps get a better reading of what they are thinking when that statement is made. Q: What are your levels on the entire base metal complex? Are you seeing sharp cuts over there as well?
A: We have certainly seen the prices of the base metal commodities fall quite sharply. But they have still not fallen significantly when you compare them to where they were perhaps in the grips of the global financial crisis back in 2009. Prices have remained relatively robust but the pressure we think again is to the downside because we have seen such a barrage of bad economic news globally and across all the major economies.
The US dollar has risen, these are all pressures that would tend to suggest that the base metals may for a little while have to mark time or perhaps go a little bit lower. I would like to call them stronger but it is just difficult to see where that strength can come from at least at this point.