Brent crude oil prices are under pressure once again, ending a run of rallies earlier in the week, with OPEC saying that its output surged in March, adding further to global glut. According to OPEC, March production has jumped 810,000 barrels per day to 30.79 bpd which is equivalent to a third of global supply.
Vandana Hari, Asia Editorial Director, Platts, says the market factors on brent crude continue to remain bearish, which have the potential to underpin prices.
At the moment, there aren't any signs pointing to an uptick in demand either, she says.
She also sees prospects of Iranian oil also coming to the market. "I don't think we have seen the bottom yet in crude prices," she adds. There is a possibility of crude retesting its previous lows, she told CNBC-TV18.
Below is the verbatim transcript of Vandana Hari's interview with Sumaira Abidi and Reema Tendulkar on CNBC-TV18.
Sumaira: Do you see prices slipping still further? How is this situation going to pan out? Some of the technical analysts are already forecasting something which is as low as USD 61 in the near-term. Do you see it slipping below that USD 60 a barrel mark?
A: Yes. Crude paring its gains today is actually no surprise to me because the overwhelming factors in the market still remain very bearish, but do seem to be, clearly some market players who are nervous and who do not want to be caught short, should there actually be a turn around in US production as well as a drop in US production. So, it seems to me that they might have jumped the gun a little bit again today, yesterday rather. So, over the longer period of time, looking at out into the rest of the second quarter, definitely there are still a lot of bearish fundamentals on the horizon that includes, sees in a low demand season globally as well as a continued as you just mentioned Organisation of petroleum Exporting Companies (OPEC) produced 800,000 barrels per day more in March. Stocks are plentiful around the world. In the US they are coming close to using more than 90 percent of the operational capacity and there is really no sign yet from what I can see of any substantial growth in demand, enough to mop up the one and a half to two million barrels per day of excess supply right now in the market.
Reema: While we understand that the OPEC oil production has surged in March, you will not be too worried about the US inventory as well as the production data which has given a sense to the market that perhaps the US production has peaked at least in the near-term.
A: Yes, the US production data and the rig count actually has riveted market attention quite a bit in recent weeks. We have seen a very steep, nearly half of the oil rigs drilling in the US have disappeared between last October and the current, last week. But interestingly, that has not corresponded with a drop in US Crude production. Yes, admittedly, week-on-week, we do see blips now and then of US production going down little bit. We saw one week-on-week 20,000 barrels per day lower, 30,000 barrels per day lower. But longer-term first of all if you look at a million barrels per day of extra US oil that came into the market last year alone, a drop of 20,000, 30,000 or even 50,000 barrels per day as was predicted by the Energy Information Administration (EIA) in May is a very, it is drop in the ocean, it is very small. It is not enough to mop up the excess supplies. And definitely then we have all the stocks sitting around as well which are adding to pressure on the market. And now Iran on the scene too; prospects of Iranian barrels coming into the markets in the next few months as well.
Sumaira: While I know you track the broader outlook for commodities but in Brent Futures, the open interest in now up to about two million contracts this week. Could that be indicative of an imminent bounce back?
A: I would not go by just the open interest position in Brent because we do see a lot of activity in the Futures market where participants come in but they go out very quickly as well. We do see a lot of quick bargain hunting buying as well as profit taking selling as well. If you want to get an idea of longer-term where are prices headed, I would suggest a look at fundamentals. There would be rallies, probably short-lived because the rebalancing of the market in terms of supply and demand being more or less evenly matched is going to take several more months.
Reema: So if the market force is overwhelmingly more bearish, then from current levels, what is the kind of downside are you predicting for an IMEX as well as WTI?
A: I would stay away from giving you any predictions even personal ones. Right now trying to predict oil prices is like catching a falling knife, but clearly I do not think we have seen the bottom, just as people say has US production peaked, it is probably not right to talk about a peak in US production, because the moment prices recover, there is a lot of drills and uncompleted wealth that could come back in the US and as a result. We will see quite a lot of volatility going forward prices could drop further than what we have seen. We have seen lows of USD 40 levels in January. They could just bottom below that before we see a more lasting equilibrium.
Sumaira: There is a lot of talk about this new strategy of the Saudis now, that why do they need to hold this much spare capacity when they continue to use it to make money. So do you think this strategy now to put pressure on the high cost producers is working and is that something you see continuing over the medium term or the longer term as well?
A: To answer the question, is the strategy OPEC or Saudi strategy working, you would really need to see a sharp decline in US production and then that decline sustaining. Even if there is a decline and it comes right back up and prices come back up, I would say that OPEC strategy would not really work in that event. But you are right about the Saudis have been, they are actually flooding the market. So, in March they had a record high production of 10.3 million barrels per day. What they are saying is that they are not going to sacrifice certainly. Effectively they are the only swing producer within OPEC. So, OPEC or the Saudis are saying they do not want to cut and lose market share while relatively higher cost producers in the US continue to pump increasingly more amounts of crude.
Reema: One final question from my end. Yesterday there seemed to be some trouble at a southern oil terminal in Yemen which is seen as a major hub for this Hadhramaut region. Should we be worried about this? How significant is this development?
A: I am actually quite surprised for these items to even find a mention in the context of oil prices. Yemen is a very small producer. Actually, yes, it is very unfortunate what is happening in that country, but it is really a non-issue when we have so much oil coming out of OPEC as well as non-OPEC countries and brimming stocks and demands nowhere near picking up. Yemen with about 1,00,000 barrels per day of production is really a non-issue.
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