Interview with MR Raghu, Head of Research, Markaz by
Peter Duke, Sales Director, Fidelity Worldwide Investment
Peter Duke: Good morning welcome to the
Fund Forum Middle East. My name is Peter Duke from Fidelity Worldwide
Investment. I am delighted to be joined today by Mr. MR Raghu, Head of
Research, at Markaz. Raghu Welcome!
Raghu: Thank you
Peter Duke: Your special subject today
is oil so of course we kickoff with the basic question around demand and supply
and how you see those dynamics in your market at the moment
Raghu: Sure! You know at a very broad
level, any commodity is always impacted by demand and supply. Price is always a
function of demand and supply and this works very well for oil as well. In the
past when we have demand slackening, the supply gets adjusted and therefore the
prices defended. Now that model has broken down and we have a double whammy now
if I may call it. So we have a weak demand and we have an oversupply , so this
is killing the price, obviously. Now the question to ask is “why is supply not
getting adjusted to a weak demand to defend the price?” ok that’s where I feel the
politicscomes in to play and that’s why I said there is a shift in the way we
have to think about the oil market in the current context of the simple “demand
– supply –price” equation.
Peter Duke: Raghu you said that
argument about politics must be the role of Saudi Arabia is key here. How do
see that and how do you judge that policies on internationally working, do you
think that it will stabilize away.
Raghu: Yes it was very surprising the
way I understand how Saudi has acted at this time around, because traditionally
OPEC which is “Saudi Arabia” always had this defend price strategy in place.
But they have observed that unconventional oil has come to the market in a big
way and the traditional price driven response may actually backfire on them
after some time. So they have decided to play the gamble and the gamble is, “don’t defend the price but defend your market
share” which means keep producing rather produce more you know to get more
market share and they know the consequence. The consequence will be a lower
price and we all see that today. But the thing is there is an inflexion point
to this gamble.They want to play this till they get the high cost producers out
of the scene and then go back and play their original equation of defending the
price. Now, the thing is “who is going to blink first?”, that is the question
now. So the way we understand unconventional producers, it’s a very hazy picture because there is a
technology angle to it, there is a price angle to it and the player profile is
different, the conventional oil is controlled by national oil companies for
example, backed by huge sovereigns, unconventional oil is controlled by small
players who are mostly in the just bond market, such a completely different dynamics. So we
don’t know the jury is still not out and we hope the Saudi gamble pays off and
the oil market comes back to at least $70-80 as they wanted to be in the medium
term. But right now we are in the scene, so we don’t know the climax.
Peter Duke: Well that might be the
answer. But have you been surprised by the resilience of Shale produces in the
US
Raghu: Absolutely, not only the
resilience but the continuous downward estimate of the cost of production,
because I remember Goldman Sachs were predicting the cost of unconventional oil
about $80 to start with about two years back. But today they are talking about $60
and they are estimating it to go down. So as the cost of production goes down
then you know both sides may not blink for a long time.So that is big event to
watch. So it’s not happening, you defend your market share and people just go
out of the system, they are just not going out of the system actually.
Peter Duke: We have new people coming
in to the system like Iran what’s your view
Raghu:Iran is not a big thing as people
make it out to be. But definitely in about three four years they will even
contribute to the oversupply situation. But not only Iran, we have to talk
about Iraq, we have to talk about Libyaall hotspots where we thought supply
could be constrainted, are never constrainted . So they are actually adding to
the glut of the supply and then demand side is getting bad and therefore we
have a double whammy effect on the price.
Peter Duke: if you see this oil crises
at these level may be increasing in the medium term. What is the impact in
terms of the GCC economies, the stresses
that may come out?
Raghu: I feel that the impact is more
negative for MENA economies rather GCC Economies. Why because GCC Economies are
sitting on huge reserves and they have the fire power to withstand this low oil
price environment for a considerable period of time. All this tension about Saudi’s
reserves dwindling very fast, it’s over blown in my view. Saudi’s definitely
have amassed huge reserves that can stand them today in good stead compared to where
they were in 1998 for example when oil prices were very low. But it will hurt
MENA economies much more than GCC economies obviously because the breakeven oil
price for MENA economies are much higher compared to GCC economies. For exampleIran
requires an oil price of $135, Saudi Arabia requires oil price of $100, Kuwait
requires an oil price of $50. So the comfort zone is definitely much better in
the GCC compared to MENA economies. So it’s the MENA economies that will start
putting pressure to the extent they are in OPEC cartel to really stop this
defending market share game and at least give us some price that we can breathe.
Peter Duke: One final question that I
wanted to put on the spot in terms of oil prices at the end of this year what
you think is the reasonable number
Raghu: That’s an easy question to
answer because we are already close to end of the year, so I am fine to take a
call on that! You know oil prices are now range bound between a band of $40 to
$60 and I think that’s going to be there for some time. The $100 oil price era
is simply gone. But we are not definitely in to the $20 oil scare as well. So
$40 to $60 is a world comfort price but whether that is the “Comfort price” for
GCC I don’t know.
Peter Duke:Raghu thank you very much
for your insights. You heard this for Fund Forum Middle East. Thank you.
Raghu: Thank you, it’s a pleasure
talking to you.
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