Crude rally driven by 'tourists'; bigger crash coming: Citi

According to Klienman, investors betting on a crude rebound could be in for a disappointment.

"The problem is we did not go low enough for long enough to do serious damage to supply side, which means we could be setting ourselves up for a very messy second half of the year because of high prices," he said.

He says if WTI climbed to USD 60/barrel, US production would come back to the market relatively quickly and once again lead to an over supply situation.

Sub-USD 50 is a reasonable price for crude in 2015, feels Klienman.For 2016, Klienman expects crude to be in the range of USD 55-65/barrel if the nuclear deal with Iran is signed, as it would lead to Iranian crude coming into the market. If there is no deal, the price could be USD 10/barrel higher, he says.

Below is the transcript of Seth Kleinman's interview with Latha Venkatesh and Sonia Shenoy.

Sonia: March and April have seen net gains for crude. The key question, have we seen the bottom for crude for now?

A: For now it certainly feels that way. This market, it feels, like it wants to go higher. The problem for the market is that it’s been fuelled by tourists. It’s not real proper commodity specialist. There is a huge amount of money that is poured in to oil from other asset investors. A lot of it coming in via oil exchange traded funds (ETFs). So it is difficult to make money frankly using these instruments. I think a lot of these investments are going to be disappointed. The money flows can continue for now especially if the dollar rally is on pause which looks to be the case. The problem is that we didn’t go low enough or long enough to do real damage to the supply side which means we can be setting ourselves up for a very messy second half of the year because of this higher price that we got now.

Latha: Do you think there is more of a rise left? Do you see crude rising to USD 70 per barrel in the current upswing?

A: If West Texas Intermediate (WTI) gets up to USD 60 per barrel, so not that much higher from where we are. I think you are going to start to see US production coming back relatively quickly. It can take a month or even two for the companies to get in gear to buy into this rally and that is the problem for the market, if and when that happens, the second half of this year, we can see a ramp up in US productions. If US production stops to ramp up, we could be right back in this much oversupplied market by the second half of 2015. So that is the situation that we are setting ourselves up for unfortunately.

Latha: In that case how much lower can crude go you think? Does it breach even that USD 45 per barrel mark? What is the low point in 2015?

A: I think below USD 50 per barrel is a reasonable number. That price even below USD 65 per barrel Brent on a long-term basis is just unsustainable for the vast majority of the oil industries. So that is where you have this tension in the market of volatility because things look bearish for now but the impact of these oil prices is going to hit supplies down the road and it is the clash between those two timeframes that drives the volatility that we got now.

Sonia: When do you see a more sustainable recovery in crude? What I want to know is if 2016 will also be a bear run for the crude market?

A: The problem with that is there is so much you need to -- there are so many big lumpy contingencies on the supply side. If we do this deal with Iran, if the deal gets done with Iran, obviously it is very contentious and volatile right now but in 2016 we can start to see material ramp up in Iranian supplies. If that is the case, then it is hard to see this markets -- I am talking Brent here -- if the deal gets done in Iran then we are in a USD 55-65 per barrel Brent market, if the deal doesn’t get done then we have USD 5-10 per barrel high.

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Latha: What do you think are the chances of an agreement between Iran and the West; do you see Iranian supplies hitting the market at all this year?

A: I think both sides want it. We have been estimating this 60-70 percent likelihood for a while now. Both sides are very interested in getting this deal done and that said both sides have got a tough path to walk politically both for the Iranian and the right wing in the US, it is going to be difficult though we think the deal does ultimately get done.

Sonia: How do you see gas prices trending in Asia for the next three-six months?

A: When you are talking of Asian gas prices, most of them are linked to oil like liquefied natural gas (LNG). So a drop in the oil prices had a direct effect on gas even if it not pricing, offer the oil index contracts right now, buyers know that they can wait and wait for the link to oil prices to bring down gas prices, so it has an immediate effect.

In the United States, we just stress tested the US supply system. We had an incredibly long prolonged cold winter and it is still up USD 3 had we have prices here. However, part of what you have seen is the front of that curve in the United States getting wacked by massive oversupply and at the back of the curve prices have fallen fast too and that is because of the oil price because the big bolster for US gas price is, is that we are going to be exporting a vast amount of LNG to Asia but those volumes are not going to be leaving the United States, if because of oil prices gas prices in Asia are still down at USD 7-8 or even USD 9 level that we have now. So gas prices in Asia, they are  going to stay weak, you have got big ramp up in supply coming out from the US and Australia and because you are not going to see a big rally in oil prices your oil index contracts stays low. So gas prices are going to stay cheap particularly in America where they are going to stay extremely cheap now that we already out of long cold winter.

Latha: If you have to forecast gas prices for the next 12-24 months, how would you see them trending?

A: You have the US starting to initiate LNG export at the end of 2015 and Australia has several more projects ramping up and right now in Europe demand is weak and prices are so low -- gas prices are going to stay depressed everywhere. Just like the days of USD 100/bbl oil are long gone, the days of USD 20 Asian LNG are lone gone as well.

Sonia: Can geopolitical developments pull up crude prices in the near term or do you think the current fall is proof against such shocks?

A: Geopolitics remains significantly underpriced risk for this market whether you are looking at Putin’s adventurism around Russia and Ukraine, whether you look at Africa, look at Libya and Yemen, whether you look at Venezuela. I think there is a long list of very significant geopolitical risks that are significantly underpriced by this market and they are not going to go anywhere anytime soon.