Crude yet to bottom; may be in low $40s/bbl in H12016: Citi

“It is conceivable that WTI Crude could head below USD 30/bbl but it may not stay there for longer. Factors like currency depreciation, high decommissioning costs which offset the initial cash cost could take oil through the USD 30/bbl-mark”, he says, adding the first quarter of next year could be the sloppiest period for crude as refinery maintenances start in Europe and North America.

Chris also expects drop in oil to drag down oil-linked LNG cargo prices. He see the global gas prices heading lower.Below is the transcript of Chris Main’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: First, what is pulling crude down so relentlessly in the last few weeks?A: It is just the continuation of the fact that supply remains outpacing demand. And as a result of that, when your S is greater than your D, you are going to have to put that oil somewhere and that oil ends up going into homeland inventories. And what you are seeing now, even at these lower prices, you are not yet bringing the supply demand relationship back into balance. So, your supply is not slowing down fast enough and your demand has not been high enough to re-address that balance. Hence, you are putting an increasing amount of oil into storage and as a result of that, that is weighing on both the flat price and the time spreads of crude whilst the very recent development of this extremely temperate winter that you are having as a result of El Nino, particularly in North America and Europe that is just hitting desolate demand as well. It is just a continuing rumbling of the bearish fundamentals in the crude market.Latha: All that news is already known for a goodish bit. Both the demand and supply factors that you mentioned – slow global demand, Iran supply and shale gas. Have they all not been factored in adequately?A: I think in part, everyone expects Iran to come back with somewhere between 3,000 and 5,000 barrels a day. The Iranians themselves think one million barrels a day in 12 months, but that seems unlikely. So, all these things have been factored into people’s oil balances, but it is difficult to square that this is not going to tip the balance in the physical oil market where things are looking pretty bearish right now. And part of the reason you go lower is because the time spreads having to weaken incrementally further to pay for the cost of storage. And as I said before, with the weather, you are just not having any supportive news flow coming for oil markets and so, you continue to just grind lower with perhaps, cash costs being potentially needed to bring the market back into balance.Sonia: So, how much worse can it get for crude. When do you think crude will bottom-out in terms of both levels and time?A: it is a difficult question, it is definitely conceivable that you can have crude going below USD 30 a barrel, likely West Texas Intermediate (WTI), it is not going to be able to stay there for any sustained period of time, because of the harm that it is going to do to corporate and sovereign producer balance sheets. However, you can get there because cash costs or operating costs are kind of the operandis around USD 30-35 a barrel. But, you also have things such as foreign exchange (FX) depreciation. You just look at the ruble, the Canadian dollar, the peso, the riyal, they are doing some of the work to shield some of the producers. You also got high de-commissioning costs that have also offset some of the initial cash costs. So, you could definitely go through that USD 30 barrel mark. When that could happen? The first half of next year continues to look the kind of sloppiest period for the oil market, particularly the end of the first quarter, when refinery maintenance is about to start globally, but particularly in Europe and as well in North America. So, if that happens and you start to see crude need to be placed on a tanker, then that is the scenario where you can see oil dip below USD 30, so I do not think we are necessarily at the bottom yet, but we are not going to be able to sustain this level of low prices for that much longer.Latha: So, in that case, what is your range for Brent in the first quarter of 2016 and what is the average?A: We see a low USD 40’s for the first quarter and low USD 40’s again for the second quarter. And the WTI Brent spread, we have very narrow USD 1-2 in the first quarter of 2016. So, similar prices for outright WTI as well.Sonia: Let us talk a little bit about natural gas prices. Will natural gas prices also decline more and what is the trend that you are noticing over there?A: There are two things in the liquefied natural gas (LNG) market, the global gas market. You have one, the fundamentals look pretty sloppy, in that you have somewhat temperate growth expectations for Asia, the key market whilst at the same time, you have the onset of US and Australian LNG exports about to hit the market. So, you have pretty lousy supply-demand fundamentals while you have the additional negative impact of oil price and a lot of global gas or LNG term contracts priced relative to oil. So, as oil drops, that drags down the price that someone pays for an LNG cargo that is linked to oil, so it has that double negative impact, so we are pretty low in terms of global gas prices. There is still some scope to head lower particularly with this extremely temperate weather that we have been having, but similar to oil yes, we may go lower, but we are already at very low levels. So, the magnitude of the move may not be massive on the downside.