Commodity prices will continue to remain under pressure, said Jonathan Barratt, Economist & CIO of Ayers Alliance. He expects Brent to head down to USD 48/bbl.
Brent crude fell around USD 53 a barrel on Wednesday as US crude stocks were expected to have surged for the tenth straight week to a new record high, fuelling supply concerns of a global oil glut. However, a weaker dollar kept a floor under prices.
Barratt feels commodities will find support if trend in US dollar turns.
Below is the transcript of Jonathan Barratt's interview with Reema Tendulkar & Sumaira Abidi on CNBC-TV18.Reema: Well, USD 53 per barrel is here in Brent. We are at 42 and a half for Nymex. Where do you see Nymex as well as Brent headed just in the near-term? What would your forecast be?A: The thing at the moment is there is so much negative news out there, that you can only think to suggest that it will continue to go lower. We are certainly looking for prices to be higher than these levels for sometime basically because they are so low. But given all of a sudden the increase in supply, the potential increased supply from Iran, you can only help but think that prices will be going lower from here. Sumaira: If I look at the chart from June last, Brent as well as Nymex’s prices have almost halved. Additionally now in Q2, the demand is seen to be traditionally weak. It is the end of winter. There are scheduled refineries shut down because of maintenance. Add to that the fact that Organisation of the Petroleum Exporting Countries (OPEC) has said that they are reluctant now to prop up prices. How will then in Q2 prices pan out? Is there a flow for prices already given the weak to stable dollar? A: We have to start to think that a flow will start. We have to start to think that we have got a risk premium in to events occurring. But when you look at the supply scenarios that are out there, there is no real unseen event that will see prices steady off. There is this potential for a larger sell-off to continue given the economies are not responding the way we should expect them to respond and given all the stimulants and that to me is concern. I think one of the other major concerns is the OPEC nations, are those weaker OPEC nations might have to produce for cash flow purposes rather than for actual demand purposes. And that to me is a real issue. If the prices remain relatively weak, those OPEC nations, weaker ones might just have to supply to anyone so that they can get cash flow to help their ailing economies.
Reema: Let us talk a little bit about supply. There is some progress made with respect to the sanctions made against Iran. If they are lifted, what could be the kind of supply that we will see on the back of Iran and what will it do to the demand supply equation? A: When you look at Iran, that is another one of those economies which is cash trapped and given the okay, given the green light to produce, you could say an extra one million barrels actually start to come on to the market. When you see an extra one million barrels come in to the market, when you have still got significant supply coming out of the oil and shale, when you see the economies not performing the way they should, that is going to be just another thorn in its side for price stability. So, yes, another million barrels on the line, then prices will remain relatively weak again.Sumaira: What about this big queue which is the Federal Open Market Committee (FOMC) meet? If the rate hike is pushed back, you would see some bit of weakening in the dollar itself, but would the impact for commodities, especially crude be limited just in the short-term?A: This is a very interesting point because when we look at the commodity complex, its bane is the result of stronger US dollar, a lot of it. We assume we have seen reasonable demand in some of the other markets such as iron ore. But the US dollar has been relatively, well be it up to a 12-13 year high and that has caused commodity prices to come under pressure. Let us see what happens with the Fed because if we do see the turn around in the trend for the US dollar and that will provide us some support for commodities. We are all looking at the word patient, let us see what they say about that. But when you look at where inflation is in the states, it is relatively low, it has not reached that two percent. The prospects for any movement here are a little bit more remote. So, FOMC will come out, status quo will be there again and we will not get any volatility out of it.
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