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Last Updated : Apr 18, 2016 10:18 PM IST | Source: CNBC-TV18

Don't see huge tumble in crude; seasonal weakness likely: Pros

Brent crude oil won't tumble below USD 30 a barrel because of failed Doha talks, say Edward Morse, Global Head-commodities at Citi and Mark Keenan, Head of Commodity Research-Asia, Societe Generale.

Benchmark Brent crude oil won't tumble below USD 30 a barrel because of failed Doha talks, say Edward Morse, Global Head-commodities at Citi and Mark Keenan, Head of Commodity Research-Asia, Societe Generale.

Brent was trading at around USD 41 per barrel in the morning.

According to Morse, Saudi Arabia had earlier indicated that there would not be a deal if Iran doesn't join in the supply cut, but market did not want to believe it. However, he does not rule out seasonal weakness for crude as refineries go in for maintenance and the underlying balance between supply and demand is very narrow.  He thinks any further downside in crude will be for the short-term and expects things to get more constructive by June.

According to Keenan, the market is likely to remain well supplied at least for the first half of this year. However, there are signs of US supply of shale oil decreasing, which could lead to a balanced supply-demand outlook for the second half of the year.


However, the failure of Doha talks has removed the speculative fluff in the market.

Oil fell after major producers couldn't agree to a cut in supplies as Iran refused to commit to output pullbacks. 

According to Keenan, WTI crude would average around USD 36 per barrel in the second quarter, while Q3 and Q4 would see it around USD 38-40 per barrel.

Below is the verbatim transcript of Edward Morse and Mark Keenan's interview with Latha Venkatesh and Manisha Gupta on CNBC-TV18.

Latha: What is the sense you are getting now? Are we going to see crude tumble even below USD 30 per barrel? Is it going to be a long tumble down?

Morse: I don’t think it is a long tumble down. I think the retreat that we have seen should have been expected. It has sort of tapered off already. We are waiting for European and US markets to open, I don’t think it will go anywhere near USD 30 per barrel but there is a lot of froth in the market based on expectations that this was for real.

There were no real good reasons, we have had statements from the Saudi Deputy saying all along that that there is not going to be a deal, the market didn’t want to believe it maybe the negotiators didn’t want to believe it but they certainly have to now.

The market still has seen some weakness ahead of it, there is still refinery amendments, the big ramp up in refinery demand for crude, it is still a month or six weeks away that should be very constructive for the market once we hit the summer and news like the news today also of Kuwait workers going on strike kind of a reflection of how the market can turn back to strength because the underlying balance between supply and demand is very narrow maybe 1.5 percent at worse. So this is going to be a short-term decline in our judgement and things will become much more constructive by June.

Manisha: Until June we are going to look at some softness continuing into the prices and February see a low of almost USD 30 per bbl. Are we going to those kinds of levels in next couple of months?

Morse: I think it is highly unlikely. The market tested those bottoms. I think market participants now understand that the Doha kind of meeting might have been necessary in December and January as we get closer to the summer time, it's less very much necessary anyway. So I think you can never tell where financial flows are going to go but there is no good reason to think at the moment that there is significant bearishness ahead.

Having said that I would note that there are three areas of potential increase in supply through Saudi Arabia itself and following the parts of Oman maybe they will try to put a lot more oil in the market. There is a neutral zone between Saudi Arabia and Kuwait with half a million barrels a day of capacity should offer on a political dispute and there is Libya where it looks as though there is potential at least for the new unified government to get some traction in putting as much as half a million barrels a day in the market.

We think there is a low probability of event in our cases but market could respond if these things happen.

Manisha: The US output continues to be on the higher side. Iran wants to continue to boost output until they reach the pre sanction levels and of course Saudi Arabia, Russia which are not going to cut output if all the other producers continue to pump output on the higher side. What is your sense on how much of demand supply mismatch are we headed for, for this quarter as well?

Keenan: Our view is that the market remains fairly well supplied certainly for the first half of this year but what is quite interesting is that if we look at the US fundamental picture specifically the supply of shale oil; we are starting to see quite meaningful signs certainly since December; supply decreases in a lot of these key shale producing regions and that sets very much in the second half of this year for a much more balanced supply demand outlook and a more stable base in prices forming which sets up ultimately for higher prices for 2017 and 2018.

So the situation we had recently with Doha, this retracement today has removed a lot of the speculative fluff in the market perhaps if it wasn't for the support of the elements coming out of Kuwait with a strike and the tightness in the North Sea, we would have had a bit more weakness but we realigned ourselves very much to where we see prices fundamentally valued for this time of the year ahead of this ultimate rebalancing of the US supply.

Latha: Therefore what is a near-term low and what is the range for this quarter for crude?

Keenan: We think that Q2 of this year is going to average basis WTI about USD 36 per barrel. I do not think we are going to go down to the low of USD 30 per barrel unless there is a broad risk aversion across the asset class linked to some more macro, more wider signal. So around USD 36 per barrel and then Q3 and Q4 modest increase in terms of quarterly averages up to around USD 38-40 per barrel on average.

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First Published on Apr 18, 2016 09:09 am
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