Across the asset classes, everything is down but raw, which is about $ 112 dollars. Why?
If you look at the broader crude market, there are some factors that put pressure on oil prices and this is the primary reason why we still have concerns about crude supply. We are well aware of the Ukraine-Russian war and what it is doing to disrupt worldwide supply and it is still putting pressure on oil prices.
The reality is that we are moving towards a better US driving season as we get on their Independence Day holiday, and we expect to see significant demand from driving or flight from the US. So, one or the other, we expect that demand to add additional pressure to the oil price. The drop we’ve seen in inventory has really done a good job for high energy prices over the last few weeks.
Oil bulls are arguing that crude oil is not available, which is a supply challenge. Is that a realistic assumption?
If there is definitely a view that the supply of oil is not available, then the oil price is not sitting where it is now, it is good and really going for a couple hundred rupees.
If there is a real crunch in oil prices and it starts to rise much higher, we will start to see US production come back into the stream. Obviously they are well below their record highs in the last two years.
And we know that Iran will probably return 1.2 to 1.3 million barrels to the system by the end of this year, and if we can see some agreement on uranium progress. So, of course there is supply. But as we have seen in terms of movement in crude prices now, a lot is pending. It may not be enough to bring back some of those productions but surely if there is a shortage of it we will see the oil price is higher than it is now.
What is your understanding of the excitement in the oil market because speculators create more demand and volatility than demand when the price of property goes up. Is there a bubble in the making because of the leverage positions in the oil?
Yes, the overall speculative end of the market is a pretty big chunk of the peaks we see in all asset classes. Investors fear they have lost something. When they see that momentum start to grow and asset class prices go up, they all join. So yeah, that’s definitely a valid point. We’ve probably seen it on several occasions. At the beginning of February last year, when oil prices went negative, it was definitely driven by speculation.
So overall, we think there is a role for speculators with the positions we are exposed to. We do not expect to see any significant move from the speculative end of the market unless we see something drastic, and at this time, what is happening in Ukraine and Russia, what OPEC is producing and what we know so well. Iran may come back to the stream with an additional 1.2-1.3 million barrels. It would need something outside of it to drive that speculative edge higher.
US President Joe Biden on Thursday called on seven oil companies to talk about lowering fuel prices. There are reports coming from a United States source, probably looking to eliminate the US federal tax to reduce fuel costs. Can oil prices be less than $ 100 or $ 100? What might the US game plan look like?
Obviously, one thing that is not within the US is high gasoline prices and because gasoline is a good business commodity within the US, every president has always tried to lower those prices.
Yes, one would suspect that the president would talk to those major US producers and ask them to try and extract more from the sectors they got but the fact that the oil price is not significant enough for them now. Make a profit on their production.
One would expect that we would need to see some support from higher demand to boost those processes, or indeed some other producing countries to shy away from production and they will actually start to shut down. Their production to raise those prices.
Oil companies are not going to offer oil, they really need to make a profit this year. The big companies in the US are aiming for it, but surely the tax we have seen, if we see it, will clearly reduce petrol and gasoline prices across the US and give it some confidence. Demand for the US and we can see that rise but we believe it is a short-term solution.
When it comes to the dollar index we are starting to see a double top, currencies that are valued against the US dollar; Gold prices are also falling. In the second half of 2022, can we see that crude oil is about $ 100 a barrel, gold stars are down and the US dollar is gaining strength?
No, we were against that call. We expected the US dollar to weaken and unfortunately it was not in the first half of this year but metrics are showing rising debt, obviously stable and persistent high inflation, which are two key metrics that we believe will not raise the price of gold. The rest of this year is low but high, and we think the US dollar will keep those metrics in place and they should actually fall and not rise. We continue to see that debt increase. We have now received a forecast that US GDP growth will slow. That would significantly increase their GDP and debt ratio.
The only factor that continues to fly in the ointment is that we have never seen other major currencies start to appreciate. It is the paradise that keeps the US dollar high. You could probably lose less in the US dollar than invest in the euro or pound, and that puts that dollar more. We are expecting it to fall so we expect gold prices to rise again for the rest of this year and possibly challenge to the last peak.