Crude prices to fall further in short-term: Experts

Below is verbatim transcript of the discussion:

Q: Can you put a flow to where this price is headed?

Sen: In the very short-term this is still a market in panic mode. So, I would expect prices to continue to head lower but eventually once this panic has gone we would probably stabilise around the new range which is USD 65-80 per barrel for Brent. Then, you will see the effect of lower prices on non-Organization of the Petroleum Exporting Countries (OPEC) supply and on demand which will take time. Second half of next year we were expecting prices to start to climb back up again towards USD 100 per bbl kind of range.

Q: Would you agree that we are likely to see prices between USD 65 and USD 80/barrel all the way up to the second half of next year at least?

Barratt: It is a bit early to say that. It is reminiscent to me of the crisis we actually had in 1986 where the price of crude lost about two third of its value.

I actually think given the level of stimulus that we are throwing at the global economy that is Japan, China, Europe and of course the US economy is - that this should actually be a short sharp move although quite aggressive. It should be in area where people should take advantage of in terms of hedging further purchases. So if there is a dip I would use it to hedge future purchases that we may need over the next quarter.

Q: Are you suggesting that prices will move back up almost as rapidly as they have declined and maybe as quick as three-four months from now?

Barratt: Given how rapidly it has moved lower, given that the people - discounted what is happening in the winter months and given the fact that we have so much stimulus now from the political economies from the US, this will really kick start a lot of economies.

We have a lot of money and we have very cheap imports starting to go into economies now. So short sharp but serious to the downside, I think it can still keep targets certainly on Brent above the USD 85/barrel.

Q: At this point in time you mentioned panic in your first answer and I can’t quite get why we are continuing to see prices drop lower because the expectation was that OPEC would not cut production. We have already known about the weak economic spots in the world, all the conspiracy theories have been discussed to death, why are prices still falling?

Sen: That is the most brilliant bit about this that pretty much everybody did expect that it would be very difficult for OPEC to cut production. We have been saying this for months that we weren’t expecting more than a rollover.

The issue is that there was still some hope that OPEC would come out and signal something in terms of even if it is half million barrels per day of cut, it would signal something.

Just the fact that they rolled over and it was very evident throughout the week that there was a huge amount of discrepancy between what the GCC members were trying to do versus the others. This really shocked the market to a certain extent that you have lost a very important feedback mechanism because people look at OPEC to cut production or increase production to stabilise the market and that has been lost.

But again in a market we have seen this in 2008-2009 as well and even on the upside when we get headlines on Iraq, it tends to overshoot and undershoot and this is exactly what is happening now.

It is undershooting and therefore, you are going to get a few days before you get a dead cat bounce, you get a small bounce and then it starts stabilising.

Q: Is the panic that spoke about largely a technical panic?

Sen: Yes, very much. I don’t think this is driven by fundamentals. Also, pure fundamentals in Q4 look fine. OPEC production in any case falls seasonally, demands picked up. It is really H1 because even with the demand pick up and we do expect demand to pick up, it is really the supply issue.

Supply won’t react that quickly and you are looking at potentially up to one or one and half million barrels/day of oversupply in H1 and that is the problem. This is because people are looking at the stock levels and that is where you are getting that kind of technical breakthroughs now and prices will keep falling.

Q: What could be a possible trigger to the upside, could it be the American winter which gets even worse than expected, what could possibly trigger a sharp reversal if that should come about at all?

Barratt: It is also important to note that the last couple of trading sessions have been as a result of low liquidity, Thanksgiving and not a complete knock and that has also added to the downward pressure for the commodity.

It is important not to forget that any trigger to the upside has to come from good economics and also a much cooler winter or even more of a crisis developing over or some geopolitical crisis starting to develop.

There is nothing on the horizon at the moment that we can really pin point apart from good economics but over the markets like this these things can just happen. So, the overshoot there should start to stabilise, how far will it decline before it actually does.

Q: USD 55-60/barrel and a potential for USD 40/barrel, you think that is within OPEC’s tolerance level? I know they have rolled over and haven’t fixed the next meeting date but they could call an emergency meeting if we continue to see these declines.

Barratt: Think of what is happening in OPEC now with the members, the members are now at a stage where Saudi Arabia is ruling the roost.

We have economies there that are under a lot of stress, Iran, Venezuela, all these economies have wanted to see production cuts, if they don’t see that their economies are going to suffer.

They don’t want to play the invisible hand theory of allocation, they want to cut and if they don’t we might see production pooled from these particular OPEC countries and that could be a trigger if market continues to trade lower.

Q: What are the chances of us going or crude oil prices, Brent dropping below USD 60/barrel. I am not doing barring the USD 40/barrel, Brent dropping below USD 60/barrel between now and the middle of next year?

Barratt: It is a sudden move. This is a panic market and if you could think of when we had the crisis in 2008, crisis in 1996 and you saw prices move as fast as they did and as far as they did before a bounce then this not beyond the realm of possibility.

We have a crisis developing and that is something that we can only look at on a day-to-day basis till we get stability, liquidity back into the market that will allow prices to stabilise. As everyone continues to say in a breath we are oversupply, if you are short of the mark then it will certainly not cover until it reaches some substantial news that suggests otherwise.

Q: Where are you putting the floor for the foreseeable six months?

Sen: In the very short-term, we can definitely see prices go towards USD 60/barrel because it is just a reaction. But it will surge around the USD 70-80/barrel in the first half of the year and then maybe USD 65-80 depending on how quickly we start getting that stability. That is going to be the key and then only in the second half of next year potential even Q4 we will move higher. But I don’t think we will go into the USD 40-50 range and stabilise there. But we can definitely see movements where we just sell-off.