Jonathan Barratt, the chief executive officer of Commodity Broking Services says the geopolitical concerns, especially, from the Middle East need to be taken stock of when looking at the price of crude oil.
If something does occur in the Strait of Hormuz, he says, “The kneejerk reaction could see crude trade back to that USD 110-111 per barrel level and even higher until we get a greater handle on what’s actually occurring.”
Below is an edited transcript of his interview on CNBC-TV18. Watch the accompanying video for more.
Q: What is your view on Brent crude which is one of the commodities that has gained 13% in 2011 and refuses to subside considering so many geopolitical risks which dominated?
A: Brent crude at the moment is at USD 108.30 per barrel. We still have quite a lot of geopolitical concerns particularly out of the Middle East. Although we feel nothing will happen but if something does occur in the Strait of Hormuz then it is quite significant. The kneejerk reaction could see crude trade back to that USD 110-111 per barrel level and even higher until we get a greater handle on what’s actually occurring. So if anything there it is a hotspot.
We do see other economies starting to slowdown particularly India and China and the US starting to pick-up. But the fear is that whilst we have concerns in the Middle East, whilst we have concerns in Iran, then you have that Middle Eastern premium starting to be built in. That’s worth about USD 3-4 but if anything happens there I don’t think you will get much change at USD 115.
Q: For a more fundamental view on crude, if all the geopolitical risks were removed, then how would you value Brent crude?
A: Once you take those geopolitical concerns out of the market, crude should be substantially lower. Brent crude should be around that USD 105-103 per barrel level. West Texas should be around that USD 98-97 per barrel level. At the moment, the market is looking at what’s happening in Europe, then what’s happening in India and China and if you ball all those together in terms of a slowdown, the only real bright spot is actually the US where we are seeing confidence coming back to the market.
What will happen in the United States will placate the easing of what’s happening around the world that overall the price should be lower rather than higher. In fact, if we didn’t have the Middle East we would be about USD 3-5 lower.
Q: What would you say might be a workable range for Brent prices through most of this year?
A: The average range is going to be tough given that we do have those geopolitical concerns. If we take those out of the market then I actually see crude trading lower in quarter one-quarter two, then start to build up in quarter three-quarter four. So if quarter one-quarter two we can see a track back lower to parity for Brent then I can see it come back to around about USD 112-111 per barrel in quarter three-quarter four. At the moment, in quarter one-quarter two I would like it to come back but I would probably like to see it start to pickup towards the close of the year. On average, Brent around about USD 105-117 per barrel to me is probably on the money.
Q: It was a pretty tame close for gold by the end of last year. For this year where would you call it on gold prices? Would you say the upside seems capped?
A: I am very much of the opinion that there is more upside. I guess one of the main reasons I feel that is that the investors’ appetite towards the metal has changed significantly over the last two years. We are seeing more investors; we are seeing more demand in ETFs and an increase in volume on the ETF market. I would say that investors will continue to look for gold because it’s easily accessed and I can see the supply-demand ratio for gold actually falling into a deficit and I see that deficit occurring towards quarter two.
On top of that, any geopolitical concerns are when people will fly towards gold. Any inflationary expectations towards quarter three-quarter four which I firmly believe we are on road to see those inflationary expectations there also people will start to buy it. I am still angling for gold to reach that magical level of USD 2,000 and I am certainly looking for that hopefully by end of quarter four 2012. So still on track for it, it may just take a little bit of time.
Q: Copper had had a very bad year in 2011. Do you think that it could see some amount of bullishness in 2012? How would you be placed on that one?
A: I don’t mind copper at all. Copper has reached a very good level. When you look at the LME Exchange at about USD 7,500, it’s consolidated quite nicely. The pickup in the States is probably one of the keys there, because sort of reduction in demand out of India and China would be peaked up by the US economy starting to pick-up. One of the interesting things here with copper is that we have got this potential for a supply crunch quarter one-quarter two.
If we do get that crunch whether it’s a little bit slow in India and China in quarter one, but if we continue to see the US start to pick up then that supply crunch could come in and as a result of that copper quite easily trade back to that USD 8,000-8,200. I would not be surprised in quarter one to see it back around USD 8,600 or maybe a little bit higher than that.
Q: What are the support levels that you would be watching out on dollar index?
A: When it comes to dollar index then I am a bull out there, there is no doubt about it. I am looking for the dollar to continue to trade higher. I actually feel that if we see the US continuing to tick over quite nicely, remember that’s one economy which has some very good values in terms of their equities then you will see funds actually fly towards the US for that investment value.
As a result of that you see a natural pick up in demand for the US dollar and that might see the US dollar continue to gravitate higher. It’s going to be an interesting year because the commodities selectively look good, but also the dollar. It doesn’t fall in hand as to how we normally see it. But I can see that dollar index dragging back through that 82-83, maybe it will hang up to that 88 level.
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