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Oil price will be in a mid 60s range with the bottom at $55: Fereidun Fesharaki

Nobody knows if the Saudis are going to fix the damage in 2-3 weeks or 2-3 months

ET Now|
Sep 18, 2019, 05.41 PM IST
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Fereidun Fesharaki-1200
Among all the major buyers, the ability of India to withstand any kind of pressure from lack of supply is the weakest. The Chinese have well over three months, Koreans have three to four months and everybody else has three or six months inventories. India unfortunately has less than 10 days’inventory, says Fereidun Fesharaki, Founder & Chairman, FGE. Excerpts from an interview with ETNOW.

When do you think the Saudis are going to be able to fix the damage from drone attacks. They are talking about 2-3 weeks.
I am sceptical about the level of damage. They think that it could be two or three months not more than that. The issue is that is this going to be fixed in 2-3 weeks or 2-3 months? That will have implications for the market.

Do you think this kind of a problem can indeed be fixed in two to three weeks or are Saudis being over optimistic?
One of the issues that the Saudis are very worried about is the other friends in OPEC and OPEC Plus agreement. If the Saudis tell everybody that it is going to take me several months to get my oil in the market, then the Russians or the Iraqis and the rest of the people from respective parties say, okay why don’t I increase my oil production right now? If they increase oil production now and breach the OPEC plus agreement, then it is very hard to put them back again to where they were before.

When Saudi production resumes and they want to bring it to the market, then that will result in a substantial drop in oil price. The Saudis want the OPEC plus to keep the agreement and do not produce extra by promising that they can return to market very fast.

Nobody really knows whether it will be two-three weeks or two-three months. Our assumption is that probably full restoration before the end of November is going to be very difficult. That means in the short term, oil price would be about $64-65. but the curve showing the longer term prices makes it clear that the price could go to $70 a barrel. If that is the case -- neither OPEC plus nor Saudis produce the oil, then we will have a big supply pressure in the market.

Saudi Energy Minister Prince Abdul Bin Salman says they “have contained the damage and restored more than half of the production; will try to bring capacity to 11 million barrels by end of September and by 12 million by November.” Oil prices went up because the world was afraid war will break out. But Trump and Putin tweets show global leaders do not want a war. Do you think the risk premium in oil will not sustain?
Nobody wants a war but we should not confuse war with regional conflict. Who is behind this event? There is more than 90% probability that this was done by Iran, may be even 95% because nobody else is capable. These drones and missile were so clever; they came in, evaded all the Patriot missiles and anti-drones and anti-missiles all and went and hit exactly at the right place. It is an incredible procedure. This is not something that Houthis can do or ISIS can do or Taliban can do. This is something which a strong and sophisticated government like Iran can do.

The message is that if you do not let me export oil, then I am going to make life difficult for everybody else to export oil. Lift your sanctions and I will negotiate with you because continuation of the sanctions is creating incredible burden for the government and for the people in Iran.

Last time when oil prices went up so substantially and when there was an oil shock, was way back in 1990-1991 when we had the Gulf Wars. That was a different regime, the world was dependent on fossil fuel. Do you think the regime and timing are different now? US has surplus oil, electrical vehicles have been discovered and so is the disruptive force of shale gas.
Basically the situation has changed and I would doubt very much if the price of oil in the short term even hits $70. We are now in the range of $65-66 and that number is going to come down. The big issue here is that the oil production has been cut the inventory available to Saudis and the rest of the world to fill the gap and that inventory is huge.
The Saudis alone have about 300 million of barrels of inventory and over a three-month period of time, it can easily supply 2-3 million barrels per day volume to the customers, until they fix this problem. The international energy agency has a huge inventory.

The Japanese have six months’ inventory. The problem is that India has no inventory and this is an unusual weakness. Among all the major buyers, the ability of India to withstand any kind of pressure from lack of supply is the weakest. The Chinese have well over three months, Koreans have three to four months and everybody else has three or six months inventories. India unfortunately has less than 10 days’inventory. This is something the Indian government should look at. In this situation, there is need for spending money and building a storage built for least 20-30 days’ supply, while the international energy agency recommends 90 days for everybody.

Do you think international governments and big countries could be looking at increasing their strategic oil reserves and which in a sense could further have an impact on demand and the supply chain will not be able to handle it?
The Americans already have announced that they are willing to release the strategic stocks. The Japanese and the Koreans have said that there is no need for it as yet but if there is a need, they would open it, but only inside their own country.

But the US opening up the stocks means exports can go up. The International Energy Agency, which has 28 members of the OECD as members, have the largest volume of stocks. They have said that as of today, they do not feel there is a need to do it. If there is a real need they would open up the stocks and those stocks are huge. If the Saudis take a year or two to fix it, then we have a problem. But if it is a matter of a few weeks or a couple of months, the problem is manageable. But it is a warning to those who do not have enough strategic storage that they should get in line with the rest of the world and not put themselves at risk.

Do you think this terrorist attack is a trigger to move the trajectory for oil? Will oil come out from a range because crude has been trading in the $50-60 or about $45-55 for many years now? Is there a permanent reboot there?
The loss of demand in oil consuming countries and the competition has basically moved the prices in the $55-65 and I do not think this attack is going to put us out. If it puts the numbers above that $65, it should be only for a few weeks. So our trajectory is still the same; $55-65 and the future of the market is still in the hands of OPEC and non OPEC countries. The Saudis play a key role. Once their problems are over, they can come back again and try to manage the market. We will stay in that level for a number of years.

When we spoke to you a couple of months ago, when there was no terror attack on the horizon, your view was that oil would settle above $60. It could settle between $60 and $70. Would you say oil in the short term could go to $70?
It would be $70 only if the Saudis cannot get the volume at hand. If they can bring it before November, it is possible to see it but basically we are at $60-70, maybe more like $60-65. There is even the possibility of going below $60 for a short while but the high prices of $80-90-100 can only happen if there is a full scale war, a real war not a few missiles here or there.

That is highly unlikely as you said nobody wants to have a war. We are in a mid $60 range for a period of time with the bottom being $55.

What role do you think United States of America play? A couple of years ago, the US was an importer of oil and now they are exporters. They almost have a double digit market share in the oil production and they are also sitting on high strategic reserves?
Well, yes that is correct. The total exports of oil from the US is bigger than Iran’s maximum exports of oil ever. Almost three million barrels per day is exported from the US. But the difference between the US and Saudi Arabia is that in the US, there is no spare capacity. The private sector is running it and they are exporting everything that they can.

Nobody keeps any spare volume at home or in the field for a strategic reason. Everybody is maximising exports. When they need more oil, the US cannot give you more oil because they are exporting whatever they can. The strategic reserves in the US are big, but not that big. The US has been reducing it.

It is not above 500-600 million barrels, not so far away from the Japanese. The US now appears to be thinking why do I keep strategic reserves because they are exporting. Strategic reserves are kept by importers. So, sooner or later, they will get rid of their strategic reserves themselves.

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