Moderate rise in crude oil likely after output freeze, says David Lennox

The concerns over a slowdown are yet to be over and that is keeping commodity prices subdued.

Speaking to Bloomberg TV India, Fat Prophets Resource Analyst David Lennox forecast a moderate price rise due to some concrete actions by the participants to actually freeze production.

Till Monday, we were talking about the great rebound in commodities and equity markets and cheering it pretty much the world over. What are you making of the pullback?

We certainly suggest that we would continue to see volatility in the broader commodity space and also in the energy space. We say that primarily because with energy, we haven’t seen factors that have been driving the prices lower actually disappear. We still have significant reserves in the US at just over 500 million barrels. And we also do have in place surplus production of 1-1.5 million barrels per day. So that’s certainly going to take any sting out of any rally going forward. We do think, however, the market has changed fundamentally. The course of the action taken by the Saudis and Russians to actually put a freeze on production of oil at the January levels — if we can see that freeze stick then that would be enough to drive the short sellers out of the oil markets.

And the same can really be applied to the broader commodities. So we have seen that relatively come to an end primarily because we do think that markets are starting to realise the effects that are driving the market at this point are rather negative.

The impact of Russia’s output freeze is not going to make much sense because Iran is continuing to pump more oil in the market. If you are saying that a freeze is working, are you saying that we would have bottomed out on crude?

The best way to suggest things is that the Brent price will close the year somewhere between $50-55 per barrel and WTI at around $50 per barrel. We are suggesting moderate price rise primarily because we do think there is at least some concrete action by the participants to actually at least freeze production. But we are yet to see if the production freeze is really going to work. And unfortunately history is against OPEC in terms of maintaining any type of control. So, we are at this point of time saying that yes, there will be volatility on the down side because we have seen that initial step.

You said short positions are out of the market. How is it looking in terms of liquidity?

We certainly think that the initial rally was driven in energy and in the broader commodities by the short selling coming out of the market and being covered.

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