Brent crude to consolidate around $72-78/bbl, Iran impact priced in

US crude oil production is rising. The trade war between the US and its major allies, if escalate, may have an impact on the crude oil demand.

"Trade war-related concern could hamper demand for crude oil. Hence, we expect Brent to consolidate around $72-78 a barrel," Ravindra V Rao, Head - Commodity Research & Advisory, Anand Rathi Commodities, said in an exclusive interview to Moneycontrol's Sunil Shankar Matkar.Q: After hitting a 3-1/2-year high of $80.50 a barrel, crude is now trading in a range. Do you expect it to be range bound or it could cross $90 a barrel?

A: We have seen a dramatic rise in the crude oil prices in the last couple of months. Major reasons being, supply issues from Venezuela, Libya, and Canada. Even though the US production is on the rise, there are supply issues owing to lack of pipeline takeaway capacity from the Permian in the US to the Gulf Coast.

These constraints mean the EIA’s forecast of the US output hitting close to 12 million barrels per day would be at risk. But now the OPEC ministers and non-OPEC have unanimously agreed upon to hike the production from July, we feel that any production dip from Venezuela and Libya might be filled by other members.

On the other hand, trade war-related concern could hamper demand for crude oil. Hence, we expect Brent to consolidate around $72-78 a barrel.

Q: How much impact do you see on crude after the US official statement saying it has told countries to cut imports of Iranian oil to zero from November?

A: Last month, after the US president Donald Trump announced withdrawal from Iran nuclear deal, the recent action was expected.

According to the latest data, Iran’s crude oil output is around 3.83 million bpd in May. There is an expectation that Iranian oil supply might fall at the end of the year. But we expect any shortfall to be filled by other OPEC members.

The sentimental impact has already been discounted in current oil prices. Further, the impact would depend on the quantum of supply loss from Iran which can be seen only when countries cut import from November.

Q: There has been a consensus among oil producers and consumers that WTI should trade around $60-65 per barrel. Does it mean that it is a balanced market?

A: Recent rally in the crude oil prices is more sentiment-driven and not based on actual demand and supply. Venezuela’s crude oil production is declining in recent months. There is also an uncertainty regarding production from Canada and Libya.

On the other hand, the US crude oil production is rising. The trade war between the US and its major allies, if escalated, may have an impact on the crude oil demand.

Since the dollar index is at a multi-month high, we may see that WTI average somewhere around $66 a barrel.

Q: What is your outlook on gold prices? Do you expect it to cross $1,300 an ounce by 2018-end?

A: More or less international gold prices are likely to stay in a broad range from $1,200 to $1,300 an ounce. The tight monetary policy of the Federal Reserve and strength in the dollar are strong headwinds for the yellow metal.

Recently prices have moved below a significant support level of $1,300 an ounce and falling rapidly. The Federal Reserve has indicated two more interest rate hikes in the remaining half of 2018. The US dollar is also hovering around multi-month high.

We have been seeing selling pressure in the SPDR and gold trust ETFs despite trade war-related concerns in the global markets. A tension between the US and North Korea has also declined in recent months.

If India receives good monsoon this year, it might lead to a rise in the rural demand ahead of the festival season. Hence, prices may reverse in September- October period due to good demand from India.

Looking at the CFTC data net long positions are at 2016 lows indicating a bottom in prices. Hence, we expect gold to find support near $1,230-1,220 and might pull back till $1,280-$1,300 again by the end of 2018.

Q: What is your view on base metals?

A: The fundamental story for each of the base metal is different. Nickel has been the top gainer of the year with 17 percent returns from year to date. There is a boom over electric vehicles across the world.

On the other hand, according to the International Nickel Study Group, nickel market is in deficit during January to April 2018 due to higher demand. Hence the view for the nickel remains bullish.

Rest of the base metals has drifted lower in the year so far.

Zinc has been under pressure this year due to pile up of inventories both on the LME and SHFE on account of demand concern. According to the International Lead and Zinc Study Group, the metal is in surplus in the first quarter of 2018. Hence, the outlook for the zinc is bearish for the second half of 2018.

Copper is hit hard this year on account of the ongoing trade war between the US & China. The market is in surplus during the first quarter of 2018. Hence, the metal is under pressure. Australian mining giant BHP Billiton is in the advanced stage of negotiations with the union at Chiles’ Escondido mine.

There are chances that the company would find a permanent solution with the union and it can avoid strike like it witnessed last year for 44 days. Overall, the outlook for the copper is bearish.

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