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See U-shaped recovery in crude; don’t short: Barclays

Miswin Mahesh, energy analyst, Barclays says oil supply may double if Iran’s sanctions are eased. The surplus as of now is 1.2 million barrels per day.

Brokerage firm Barclays is overall bearish on the outlook for crude oil and believes that the asset class may perform even poorly if supply from Iran starts flowing in.

In an interview to CNBC-TV18, Miswin Mahesh, energy analyst, Barclays says oil supply may double if Iran’s sanctions are eased. The surplus as of now is 1.2 million barrels per day.

Iran and six world powers tried to break an impasse in nuclear negotiations on Sunday ahead of a deadline to find a preliminary deal by Tuesday .

Furthermore, Mahesh advises investors to not short the asset class as the risk-reward ratio is unlikely to be in their favour.

Mahesh sees Nymex crude in USD 38-42 range.

Below is the verbatim transcript of Miswin Mahesh’s interview with Sumaira Abidi & Reema Tendulkar on CNBC-TV18.

Reema: In one of your recent articles that I was reading you indicated that we still have quite a lot of variables that could affect the spot price for a long period. At least for the last four months oil seems to be fairly sideways within that USD 15 range. What is your sense which direction is crude likely to head next and what could be the key factors that will governor it?

A: We are still bearish on crude oil for the second quarter in terms of fundamentals it is a period where the actual surplus in the market is expanding relative to Q1. However, the surprise band-aid so as to say that has come and helped oil market balances at the moment is the fact that you have got the Yemeni strikes which have been started by the Saudi government and that has cost bit of the geopolitical risk premia to come back now.

Yemen is fundamentally in terms of its contribution to the oil market it is not as big it is the 39th biggest oil producer. The reason Yemen is important is for two reasons from geopolitical point of view it is a proxy war between a lot of actors in the region and if that cascades into something very big that is what the fear in the markets is. The second thing is in terms of Yemen on a strategic shipping choke point- 3.8 million barrels per day of oil goes through those channels and that is the big worry for the market at the moment.

So that has been priced in but fundamentally as you mentioned before we Barclays is still bearish on crude oil for the second quarter just because there is no supply adjustment or demand adjustment that is coming to absorb that surplus in the market.

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