Brent crude to gain in H2CY12; eyeing USD 121/bbl: Barclays

Amrita Sen of Barclays Capital tells CNBC-TV18 that there may be more headwinds for Brent crude which could further pull down prices in the near-term.

“There are a lot of concerns about Greece and the euro area as a whole, and there are also concerns about slower growth in China and India as well,” she explained. However, she believes that an increase in demand despite geopolitical concerns could support prices at high levels. “There may be a little more downside, but I think this is where they start stabilizing and then into the second half of the year move higher,” she said. She further adds that Brent could hover around USD 121 per barrel for the next two-three quarters. Below is an edited transcript of her interview with Latha Venkatesh and Ekta Batra. Also watch the accompanying video. Q: We have seen a fairly continuous fall in crude prices accompanied by a fall in several risk assets. Do you think there is more headroom for crude to fall considering that USD 95 was considered quite a support? A: I think in the short term we could see a bit more headwind in prices just because there are a lot of concerns about Greece and the euro area as a whole. There are also concerns about slower growth in China and India as well. But if you look at the fundamentals of crude oil, with geopolitical tensions still there, the fact that overall demand is starting to pick up and non-OPEC supply outages are still continuing will still be support for prices at fairly high levels. When we look at Brent prices, they are trading at around USD 110 per barrel. There may be a little more downside, but I think this is where they start stabilizing and then into the second half of the year move higher. Q: What is Barclays’ in-house view on the dollar index as well as the euro-dollar and what might be the impact on crude? A: Of course we take all of that into account when we are doing our crude oil analysis. On a very short term basis, yes currency movements have an impact on oil, but on a very long term basis it really doesn’t. If you look at price movements across currencies, they have risen, its not that oil has fallen in euro terms while risen in dollar terms over the last 10 years. I think our general house view on the dollar-euro is that the euro is going to continue to remain under pressure, but it’s going to be a very gradual one. Over time, the euro will weaken against the dollar while the dollar continues to strengthen. In terms of commodities, and particularly for oil, you can argue that has a little bit of a negative impact on the day to day trading basis. But do we think as a result of that oil prices will not continue to rise? Absolutely not. If you look at demand–supply balances and spare capacity, that’s the key determinant at that point of prices it’s still very low. So oil prices will still continue to remain high. Q: Is Barclays penciling in the possibility of a Greek exit from the euro at this point, and if that does happen, will it lead to a further fall in crude prices? If so, what are the lows that you would possibly be working with? A: Our economists definitely don’t expect Greek exit. If you look at the polls within the country, they are quite against the Greece or the country as a whole exiting the euro area. In terms of how low do we think crude oil prices can go, I think USD 100 per barrel is very much a floor for prices. OPEC thinks prices are comfortable for both consumers and producers, and where they would want prices is very much USD 100 per barrel. If you look at non-OPEC supply, that is also very much at USD 100 per barrel, your sale oil, your  deep water drilling that is going to take place again at USD 100 per barrel. When you see a risk of trading scenario where everything is coming off, you get a repeat of 2008 situation that is kind of the worst case situation when prices that time went down to as low as USD 30-40 per barrel. Do we see a repeat of that? No, we would say if it were to mirror that kind of a situation, maybe prices go down to USD 70-80 per barrel but otherwise USD 100 per barrel is a very solid flow because OPEC is producing at record levels they can easily cut back production and raise prices once again. Q: Given the geopolitical concerns as well as the economic patterns that you alluded to that we can get out of China, India, US and Europe, what kind of range do you think that we would be working with for crude for possibly the next one-two quarters? A: I think in terms of the range of crude prices, this quarter we had expected a softer quarter. Fundamentals had weakened, there was a lot of OPEC production going around, and so this price move is very much within our forecast. If you look at where we expect prices to head for the next couple of quarters, we are looking for an average of USD 121 per barrel for Brent. Essentially, we would expect both demand and supply dynamics tighten up. Demand because if you look at the US numbers, they are looking a lot better, a lot healthier, they are showing the first year-on-year (YoY) increase for over a year. This is the first time US saw oil demand is in positive territory in terms of growth so that is helping. Japan is a big pull for oil, their summer demand is coming up as well post Fukushima no nuclear plants are running. So overall demand/supply tightens up or you add to that the lost Iranian barrels and you can see the fundamentals tighten up. So not a huge amount of upside, it is about USD 10 per barrel upside, but it is still nonetheless an upside from here based on the fundamentals. Obviously capping that upside will be these political factors we talked about particularly for Europe and also let us not forget an Strategic Petroleum Reserve (SPR) release which the governments are likely to do if prices go too high.