Wednesday, November 30, 2022

Can Crude prices drop to $100 or below? David Lennox explains

“Oil companies are not going to give oil; They really have to make a profit for this year. That’s what the big companies in the US will be aiming for, but of course if the tax comes through, it would immediately bring down petrol and gasoline prices across the US and that would instill some confidence in US demand. But that’s only a short-term correction, we believe, says David Lennox, resource analyst at Fat Prophets.

Everything is coming down across asset classes but for crude, it remains around $112. Why?

If you look at the broader crude market, there are a few factors that are maintaining that tension in oil prices and that is the primary reason why we still have concerns on crude oil supply. We are well aware of the Ukraine-Russian war and what it is doing to disrupt supplies around the world and it still fuels tensions inside the oil price.

The fact is, we’re moving towards what’s going to be a good US driving season as we approach their Independence Day holiday and we would expect that we would see significant demand from the US, either driving or flying. So, one way or another, we expect to see that demand putting additional pressure on the price of oil. The decline in inventory we’ve seen has really completed the good environment for higher energy prices during the past few weeks.

Oil bulls are arguing that there is no crude available, posing a supply challenge. Is this a realistic assumption?

If there was certainly the idea that the supply of oil was not available, the price of oil would not have settled now, it would have been well and truly headed towards a hundred bucks.

If oil prices were having a real crisis and started rising too much, we would start to see US production restarting. Certainly they are well below the record highs we have seen in the last few years.

And we also know that Iran can probably put something like 1.2 to 1.3 million barrels back in the system by the end of this year and if we can see some deal on uranium progress. So, there’s definitely supply. But now a lot of it is pending as we have seen in terms of volatility in crude oil prices. Some of that is not enough to bring back production, but certainly if there is a shortage we will see the price of oil higher than it is now.

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What is your understanding of the oil market volatility because when the price of an asset exceeds the underlying demand it creates demand and volatility for speculators. Are there any bubble formation due to leveraged positions in oil?

Yes, the overall speculative end of the market is a big part of the peaks that we see across all asset classes. It’s the fear that investors think they are missing out on. They all flock when they see that momentum is starting to pick up and the asset class’s price moves higher. So yes, it’s definitely a valid point. We have probably seen this on several occasions. In early February last year, when the oil price turned negative, it was definitely speculative driven.

So overall, we think bookmakers have a part to play with the positions that we have seen open. We are not expecting that we will see any significant move towards the speculative end of the market unless we do something drastic and at this point in time, we are well aware of what is happening in Ukraine and Russia, what OPEC is producing. and that Iran could return to the stream with an additional 1.2-1.3 million barrels. It needs something outside of it to elevate that speculative edge.

On Thursday, US President Joe Biden summoned seven oil companies to talk about reducing oil prices. There are reports coming from a United States source that the US may also be considering removing a federal tax to reduce fuel costs. Can oil price fall below $100 or below $100? Could this be America’s game plan?

Certainly, we know that one thing that is unlikely to happen inside the US is high gasoline prices, and since gasoline has become a well-traded commodity inside the US, every president has always Tried to keep prices down.

One would suspect that, yes, the president would talk to those major US producers and ask them to try and extract more from the fields they had, but now it’s really a fact that the price of oil isn’t enough for them. Is. make profit on their production.

One would expect that we would need to see some support from a higher increase in demand to get those processes up to a higher level, or indeed that maybe some of those other producing countries move away from production and they really start to shut down. They tax their production to raise those prices higher.

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Oil companies are not going to give away oil, they actually have to make a profit for this year. That’s going to be the target of the big companies in the US but of course the tax that we’ve seen, if we see that’s going to come, it’s obviously going to bring down petrol and gasoline prices across the US immediately and that will give some confidence. US demand and we can see that increase but it’s only a short-term solution that we believe in.

We have also started to see double tops when it comes to the dollar index, currencies that are depreciating against the US dollar; Gold prices are also declining. For the second half of 2022, could we see crude at around $100 a barrel, gold stars moving down and the US dollar strengthening?

No, we’re on the opposite side of that call. We have expected a weakening of the US dollar and unfortunately that hasn’t happened during the first half of this year, but the metrics are showing rising debt, certainly stable and persistently high inflation, those are the two key metrics that should help us. I believe that will drive the price of gold. Low but high for the rest of this year, and that’s because we think the US dollar will hold those metrics in place and they should really fall, not rise. We see that debt is probably going up. We’ve got a forecast now that the US GDP growth rate is going to slow down. This raises their GDP to debt ratio to a much higher level.

The only factor that remains a fly in the ointment is that we haven’t started to appreciate those other major currencies. It’s been a haven that’s been keeping that US dollar high. You can lose less in US dollars than you can invest in euros or pounds, and that is what keeps that dollar high. We are expecting it to fall so we expect gold prices to rise again for the rest of this year and maybe even challenge the last high.

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