Iran may accept a diplomatic solution to the nuclear issue
MUMBAI: The new financial year may have started on a subdued note, but there’s good news on the crude oil front. Oil analysts believe the probability of a correction in crude prices by the next month is very high, as there are no real triggers to push prices further. In fact, prices are likely to remain capped at current levels ($120/barrel of Brent) in the April-June quarter.
Several factors have contributed to this weak outlook on crude prices, which have stayed over the $100-mark since 2011. According to commodities experts at Barclays, given prices already high with no momentum to draw on, it is likely to take a significant catalyst to generate any significant and sustained upside in the second quarter of the calendar year (April-June). Thus, April-June is expected to be calmer for oil markets, as crude stock releases will keep prices capped. This should calm the nerves of emerging economies like India. There are several factors contributing to the weak sentiment surrounding crude oil. For starters, oil analysts at Barclays say military escalation against Iran looks unlikely this quarter, or even this year. The market believes while the nuclear issue may remain unresolved for a while, there is no risk of conflagration that would push oil higher.
According to Singapore-based OCBC Bank’s commodities research desk,Iran’s economy has been steadily deteriorating due to the sanctions placed on it and it is possible the country will come around on the nuclear issue. Iran has been forced to accept consumer goods, wheat and soyabean as payment for its oil — also referred as the “junk for oil” programme. According to OCBC analysts, “Denied of hard currency to support the rial and its potential inability to pay for necessities, Iran may eventually be persuaded to conform to international pressures. Should the discussions turn favourable, crude oil prices will face immediate downward pressures.”
Another big reason why analysts believe Brent will correct to $105/barrel-levels, is a reversal in the market trends. Markets seem to be shifting away from their “risk-on” mode, as is reflected by the sell-off seen in developed markets in the last few days and reduction in long positions of WTI crude oil contracts over recent weeks. However, robust demand from Asia and tight spare capacity may prove wild cards and upset the weak forecast for crude oil prices.