CNBC: Price pressure on crude to continue: Hudson Cap
Jonathan Kornafel, Director, Asia at Hudson Capital Energy feels that the price pressure on crude will continue. He expects crude to fall to USD 85 per barrel. Commenting on steel, the demand in China has come to a halt, he added.
Here is a verbatim transcript of the exclusive interview with Jonathan Kornafel with CNBC-TV18. Also watch the accompanying video.
Q: What do you think has been happening with the crude market and do you expect to see significant price pressure from hereon?
A: Absolutely. The price pressure is just going to continue building. A couple of days ago crude was up around only USD 98 per barrel. Everyone was expecting a bigger bounce of up to, maybe, USD 105 per barrel after the US bailout package was passed; a lot of bearish pressure was expected after that. However, the bounce never came and the market just came off. At present, we are sitting at about USD 2 lower. There is nothing on the horizon that looks even remotely bullish from the demand as well as from the supply side.
The hurricane season is close to being over in the Gulf of Mexico and the United States. Even with the damage that we have seen in the production and refining side in the Gulf of Mexico, we are still seeing the refining margins for the US gasoline at close to zero. This means that even with the good percentage of these refineries knocked out there is still no demand for gasoline, and that really is going on in economies right now. In the US and the West there is no demand for gasoline even with these production sites knocked out.
So, the refineries at this time are going to turn to producing heating oil for the heating oil season. They just cannot even get rid of the gasoline that they have in stock. Hence, we certainly expect the pressure to continue and the market is certainly going to test lows; even this week we might even see below USD 85 in WTI (West Texas Intermediate) and try for the USD 80 level.
Q: Metal stocks here have been completely hammered on fears that base metal prices will collapse some more because of the economic weakness that you referred to. Do you see much more of downside in some of the hard metals such as steel, aluminium, copper and zinc?
A: Steel is an interesting case right now because the demand in China for this metal has come to a halt all of a sudden. No one in China is buying steel at present and coal supplies are building up in China. So, itís across the commodity sector. Also, we have seen amazing highs and volatility in terms of gold because a lot of money has been pulled out of equities and other commodities and put into gold. Their money is just taken back out the next day. Thus, there is enormous volatility in gold. We are seeing volatility across all the commodities, across all equity sectors and thatís why right now we are recommending our clients who are hedged to use options, to hedge not only the downside but the upside risk as well.
In the last couple of days, we have seen a number of airlines, shipping and freight companies end off the market, starting to look at consumer hedges, looking at upside calls that have gone very cheap. Even with the high volatility that we are seeing, which of course, increases option premiums or recommending them buy call spreads which for the most part only gain from lot of their volatility. One always knows the amount of money that he can lose if the market continues going lower. But, of course, thatís what an airline or shipping company would want so the markets to continue lower. So they do not mind losing a couple of dollars here and there on buying a call spread.
In terms of producersí strategies, I would be recommending things like buying the USD 85 put, selling the USD 70 dollar put, that is, USD 15 wide put spread. One can get for very cheap and can even do it for zero cost or selling an upside call. Thus, one can use a lot of different strategies in the options market right now even with this volatility. However, volatility is the perfect time to get in the options because one will only lose a very limited amount of money when he is hedged properly in the options market.
Q: There have been a lot of reports over the weekend about funds going belly-up. A couple of funds might have problems as well because of redemption pressure. Is a lot of that still unfolding in your commodity market?
A: Thatís going to continue because a lot of time one sees the funds collapsing, maybe, because they call the market in the wrong direction which is interesting because a lot of hedge funds are supposed to be trading volatility and suppose to be making money as the market bounces around. Whether it goes up or down, one is suppose to make money.
However, in terms of having trouble getting liquidity is the moral of the story and being able to balance oneís books can be followed by anyone right now and thatís what has made the market so volatile. There is so much panic in the market right now because even if one is doing the right things which he is supposed to, one cannot get hold of the correct amount of funding to continue to trading. Subsequently, one is going to be in real trouble and that is not necessarily reflection on type of trading that he has been doing.
Q: What is the general mood in Singapore both in commodities market and the equities marketĖis it just pure gloom and doom or has it come to that point where people are saying value is emerging and we need to start deploying money at some point?
A: My trading roots are from the floor in your mercantile exchange, so when I talk to my friends in New York on the floor, it is lot of gloom and doom there and everyone is very concerned. It is even a bit dangerous as lot of protestors in the Wall Street area and New York City are walking around down there. So itís scary walking around outside if someone knows you are a trader or a banker.
In Singapore, itís a little differentĖthe crisis that we have seen in the Western world has not spread over here to an extent yet. Although they are starting to see a bit of drips and drabs of it, but some currency traders and some other traders feel that the job market is not as healthy as it once was even maybe six to eight months ago.
So the doom and gloom is also starting to rear its head here, although it is nowhere near the same level as we see in the West right now.