FocusPrepare now for $10-30/bbl oil – Hodges video interview
02 May 2013 13:08 [Source: ICIS news]By Will Beacham
LONDON (ICIS)--Crude oil prices will return to their historical levels of $10-30/bbl as the fundamentals of increasing supply and tepid demand growth overcome the current speculative bubble, a leading consultant says.
Speculation by financial investors has pumped money into oil markets, artificially inflating prices and creating a sustained disconnect from the real price drivers of supply and demand, according to International eChem chairman, Paul Hodges.
In a video interview he said: "There is no doubt about it in my mind that oil prices will go back to historical levels of $10-$30/bbl range. People may say that is impossible but from 1900 until the central banks started playing around in this area, that’s where they always were."
He said that only during the Iran crisis of 1979-83 and on three other occasions did prices deviated from these levels. Natural gas prices in relation to oil are also indicating that oil should be around $30/bbl.
"Companies, business managers and financial people have to look at this very carefully indeed. If we look at the fundamentals of oil we see that there has been no great growth in demand and no problem is obtaining product. Inventories are at high or record levels in most regions; meanwhile, supply is increasing quickly."
He added: "The poor consumer has to heat their home, has to fuel their car, and they haven’t got any money left. That’s why economies are in such a bad shape."
Hodges blames central banks’ liquidity programmes such as quantitative easing (QE) for panicking pension funds into pumping money into oil.
"The pension funds said, ‘They’re trying to devalue the dollar; what does that do to our investments? We must find a store of value – let’s use oil because it’s a well-used commodity, priced in dollars, and it will go up’."
The IMF said recently that 25% of some pension fund assets have been put into oil. Now, however, pension funds may change their strategy and withdraw from oil following Japan’s decision to support its currency and exporters via QE, said Hodges, who writes a blog for ICIS.
"One hopes that we won’t see a sudden collapse as that would be incredibly difficult for the chemical industry to handle. Just think about the fact that we’ve got 45-60 days of product tied up in our system. If that was devalued by half or three quarters what on earth would we do?"
The chemical industry must prepare: "Companies need to sit down and ask ‘What would we do if this happens? It’s not our base case but if there is a 10% chance of this happening then the Boy Scout motto is the right one ‘Be Prepared’."
Read Paul Hodges' Chemicals and the Economy blogBy: Will Beacham+44 20 8652 3214
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