Crude rally is a hope rally, may not sustain itself: ANZ

Oil prices on Tuesday rallied and hit a high for the year on back of news that major oil producers would agree to freeze output at a meeting on Sunday.Currently, crude is trading at around USD 44 a barrel, says Daniel Hynes, Senior Commodity Strategist, ANZ Research.

However, Hynes is not convinced that the rally is likely to sustain and thinks this is more of a hope rally than any improvement in fundamentals.

“It is too early to say if crude recovery is sustainable,” says Hynes.

According to him, Saudi Arabia, a key oil producer, may not agree to freeze production without Iran. However, in the short-term he expects strong rally backed by expectations of better growth. "Ultimately at the backend of the year we think that the decline in US supply would push prices towards USD 50/bbl mark," he adds. Below is the verbatim transcript of Daniel Hynes's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18. Latha: Is the market celebrating too early or do you think that USD 40/bbl could be the new bottom for crude? A: I think it's a bit premature. Certainly the indication so far has been that Saudi Arabia will not enter any kind of production freeze without Iran and also enter into that agreement. On the other point, the actual freeze itself, we are seeing record levels of output from a lot of Organisation of the Petroleum Exporting Countries (OPEC) members as well as Russia. So to freeze at these levels doesn't provide the support, I think the market ultimately needs and supply need to readjust to this lower growth environment that we are now entering into. At the moment I feel like it is a bit of a rally based on hope and expectations rather than any fundamental improvement. Sonia: If on Sunday there is no crude output freeze between the two top producers then do you expect to see Brent crude selloff yet again and in the very near term, in the next three-six months what is your outlook on crude? A: It might be a bit of sell, certainly running up to this meeting it does feel like most of that has already priced in for the market. So we would see potentially selloff even if there is a broad agreement reached in that market.However, over the next six months we are expecting to see supply adjustment outside of OPEC really taking that market up and particularly in the US where we are seeing the impact of low prices already resulting in fall from their recent record highs. We do think prices could certainly rally into the backend of the year although if things get too far ahead of themselves there is a risk that we could see some of the US supply particularly activated. So for us it is going to trade in a relatively tight range but with a bit more of an upside. Latha: What is that range is what we are looking for. Yesterday the International Monetary Fund (IMF) also cut global growth forecast. So whatever happens, demand is not looking up. So what is this range you are talking about? Is USD 45/bbl the upper level? A: I think it is sort of fair value where we are now but could also move into high  USD 40's by the end of the year. Certainly in the short-term we are seeing a strong rally on the back of rising expectations of better growth but ultimately at the backend of the year we think that the decline in US supply would push prices towards USD 50/bbl mark.