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Last Updated : Mar 18, 2016 10:39 AM IST | Source: CNBC-TV18

Crude can touch $55 per barrel by year-end: Fat Prophet

David Lennox of Fat Prophets says that the market will be disappointed if it is only a production freeze at Doha.

Among commodity assets, crude prices hit highest levels for 2016, with Nymex crude above USD 40 per barrel, on optimism that major producers will strike an output freeze deal next month amid soaring gasoline demand in the US.

Crude prices on Thursday hit its highest level for 2016 with Nymex surging five percent to trade at USD 40 per barrel and Brent trading at USD 41 per barrel.

The crude moved higher on back of hope that major producers will strike an output freeze deal in April amidst rising gasoline demand in the US. Saudi Arabia and non-OPEC producers led by Russia are scheduled to meet at Doha on April 17.

David Lennox of Fat Prophets says that the market will be disappointed if it is only a production freeze at Doha. With increasing pressure on the supply side, one could see some cuts on supply side as well, he says.

Going towards the Doha meet, Lennox expects crude to touch USD 45 per barrel, but has a year-end target of USD 55 per barrel.

Below is the verbatim transcript of David Lennox's interview with Latha Venkatesh and Reema Tendulkar on CNBC-TV18.

Reema: We have already seen a more than 50 percent rally from the February lows for crude prices, would you give it more and is there any fundamental backing to the upmove that we have seen?

A: We think that that has certainly been the first change that the market is seeing in probably 12 months in the crude market that suggests that there could be some upward pressure on supply. Now we are seeing certainly further indications that perhaps we could see further pressure on the supply side.

Latha: Are you expecting supply cuts, what the Organization of the Petroleum Exporting Countries (OPEC) were speaking about, was the supply freeze at January levels and even there you had recalcitrant members like Iran, do you expect that there will be supply cuts?

A: There is one key difference to the meeting that the OPEC will be going to Doha on April 17 and it is the fact that we have had the two big producers come together and instigate a freeze in production but that yet has to follow through. But what they have seen is the reaction from the market in the oil prices and there has been a significant rise.

So we do think that if OPEC was clever and the members of that meeting are very clever, I would think that they could spread the current surplus of production by reducing production across each of the countries. So we think there is a good possibility that we will see some action coming out of the Doha meeting and that will see supply cuts. However, unfortunately history is well against this and for many years, OPEC meetings have tended to come to nothing. So it will be one that is very closely watched.

Reema: Let us work with the two hypothetical scenarios. If it is just a production freeze and not a cut, then what will be the market reaction? Will we see some disappointment and therefore retreating in prices? And secondly, let us go with the optimistic scenario that there is a production cut. What could be the quantum of it and therefore, the prices?

A: There is no doubt that if we just see a freeze, there will certainly be some retracement of the oil price on the announcement of just a freeze in production. However, we do think that that will give the market some longer term support and we would see markets rally towards the close of the year.

If there is in fact a price cut and we can see that surplus extinguished altogether, or perhaps even a deficit reappear, then we would really see quite a strong rally in the oil prices. At this moment, we are still holding to our Brent price closing at USD 55 per barrel. We do think that there will be some action taken, but at this point in time, not enough to significantly sustain a stronger rally.

Latha: When do you see it going to USD 55 per barrel?

A: We think it will certainly be at USD 55 per barrel by the close of the year. So, we are certainly expecting any rally to be fairly modest and we are not expecting it to be sustainable through to higher level, primarily because there are some headwinds there. Firstly, if there are production cuts from OPEC, we have really got to see them.

Latha: That is why I wanted to know more in the run up to Doha. Basically, I am asking you for a one month view, starting March 18 to April 17.

A: We certainly think between now and then, we will continue to see the Brent price rise, probably touching USD 45 per barrel in the near-term as the meeting does draw closer and the market does become a little more comfortable that perhaps we will see an outcome or a positive outcome. And then, it will be post that meeting that we will see the significant move in the oil prices.

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First Published on Mar 18, 2016 08:33 am
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