Crude oil prices slipped below $ 124 per barrel on demand concerns on Tuesday after hitting a 10-month high of above $ 125 per barrel last week. Analysts say that if crude price remains high, it will impact European economies, which are struggling because of a weak euro against the dollar.
“Oil may hit $150-$200 per barrel level if there is an Israeli military attack on Iran,” said Amrita Sen, commodity strategist at Barclays Capital.
Sen told NDTV Profit that the demand for oil in Asia is strong, but weak in the US. As far as the release of the Strategic Petroleum Reserve (SPR), which is oil stored by the US for emergencies is concerned, Sen said that a mere rise of prices cannot justify its release.
Here is the interview in full. You can also watch the video here.
- Fundamentals are demand-driven or are they largely related to the speculation on Iran strike by Israel?
- Fundamentals have played an important part. People have been underestimating how much supply has been lost as well. If you count Syria, Sudan and Yemen, you’ve lost almost a million barrels a day; it is a combination of both.
- But if you look at the supply side, there has been some disruption in smaller countries but it is not like a huge amount of oil that has gone off the market?
- If you're looking at smaller countries like Yemen, Sudan and Syria, they have lost output of a total of a million barrels per day. If you put that against a backdrop of demand in Asia, it is a much stronger demand, especially compared to the US demand, which is still very weak. However, a combination of that means that inventories have been drawing down despite the output being above 10 million barrels per day and Iran is struggling to sell its exports as well.
- Help us understand the Iran situation. The immediate issue is that Europe and perhaps Asia are cutting down on imports, but the International Energy Agency says that they can deal with that. Can they?
- Europe on its own might be able to manage that but of you are looking at China, one of the biggest companies there, has cut back half of the imports they take from Iran. Japan is going to cut back around 11 per cent; South Korea has cut back about 25 per cent. India again is not necessarily cutting back due to political reasons but they are facing payment problems .The issue is we have to start looking where the crude will come from.
I agree that Iran might put crude on ships; however, this crude is not getting anywhere. At the moment, they can’t sell it. The replacement has to come from Saudi Arabia and there is the problem. We reckon overall global spare capacity is around 1.6 to 1.7 million barrels per day (mbpd), but that’s clearly not enough to offset 2.3 mbpd exports that Iran gives to the world.
They are not going to lose all of it, even if it’s just Europe that we are talking about plus a little bit of other countries, you are above a loss of one mbpd. In a market where there are so many other issues, it’s not just Iran, there is Iraq there is Nigeria. Anytime you go down to spare capacity, which is less than one mbpd, automatically the prices will rise. You should have at least five per cent buffer. Inventories have been low as well. So there is not enough buffer in the oil market at present.
- But the oil is still not going off the market? And it can be met through a Strategic Petroleum Reserve (SPR) release?
- It goes back to the point that it was a very tight market; 60 mbpd of SPR released was absorbed just like that and nobody even felt it. There is a fear in the market now, that again means that the SPR release can be absorbed. If there is an escalation of an event, like there is a blockage of a strait or there is an attack, then they can justify an SPR release.
However, if prices keep ticking higher, you can’t justify an SPR release. It has to be an event driven-thing. At the moment, what’s going on in the Middle East is proxy wars. Syria is an absolute forefront of what’s going on between Iran and Israel. Iraq again is seeing an increase in violence. These will be the units that can be used for proxy wars, prices can keep ticking higher but how does a government justify SPR release? This is the worst case scenario for oil markets.
- What about the Hormuz Strait?
- Our view very much is if the (Hormuz) Strait doesn't get closed, the US has its 5th Fleet in Bahrain; they should be able to keep the Strait close. I don't think it’s in Iran's interest to block the Strait because whatever oil they sell goes up to 40 per cent of what is traded globally. Around 90 per cent of the Persian Gulf oil goes through that, it is a very important transit route.
It’s not an impact on supply as supply is not affected, it’s a transit thing. If you do block the Strait of Hormuz, there are some other pipelines that could take up some other slack. We just don't have enough capacity to take all that crude out to the rest of the world. It’s a transit blockage essentially, ships won't be able to go around and that is just an escalation in that situation, which can send the prices way above $150 per barrel, even nearing $200 per barrel, so I don't think that’s our base case. You are looking at that those escalating points that can drive prices very high.
- What’s the base case scenario for oil prices and what is the extreme case scenario?
- As far as the base case scenario is concerned, we have got a $115 per barrel for Brent, based pretty much on the supply-demand fundamental. A risk to that price is to the upside at the moment; the problem really is that there is no resolution in sight today. The fear in the market is the reason why prices have ticked up, and Iran has had an impact on these prices. Fundamentals aren't easy either .If you had a good inventory buffer you would have argued that prices could have come off.
- What about India?
- India is a very big importer of the oil; it imported 4 mbpd of crude as per the January data, which is a record high given the disparity between the production numbers. However, subsidies are still in place. The gasoline products are not subsidized anymore but the diesel is. There is a huge burden on the government. Hence, the government will have to get rid of subsidies. The demand is rising very quickly. China is revising the prices as well.