Bill O'Neill, founder, Logic Advisers offers his perspectives on CNBC-TV18 as oil surged on Friday in heavy trading to the fourth biggest daily gain on record, on a deal by European leaders to shore up euro zone banks triggered frantic short-covering by funds that had been riding crude's price collapse over the last quarter.
Brent crude oil futures rose more than USD 6 a barrel to near USD 98 while US crude jumped by more than USD 7 to settle just below USD 85 a barrel - the fourth largest daily gain in dollar terms since the contracts were launched.
Below is an edited transcript of the analysis. Also watch the accompanying view.
Q: What do you make of the increase in crude prices today?
A: This is one of those knee-jerk days when everybody dives into the pool at the same time. Also remember there are a lot of short positions that some of market-traders are overcommitted to. So when the European news came out, it was definitely a surprise.
In our closing comment for Logic Advisers, we wrote that even some minor good news would probably be a boost to the euro and the equity markets, and anticipation of some scope of an agreement. Thats what happened today.
Now does that totally change the picture? No, it doesn't, it's an improvement, a step in the right direction, but we still have to be very careful. We have an unemployment report next week, who knows whats thats going to show.
The previous employment data we have seen has not been good. What will happen over the weekend? Will some European leaders make some comment that will roil the markets on Monday? So there is much in the air before we can say any kind of trend has suddenly reemerged for commodities.
Q: There is a lot that could potentially push prices down further. The US sanctions against Iran, the European sanctions against Iran kick-off next week and supply constraints in Norway because of those strikes and Iraq pressuring the OPEC to cut production. Doyou think that will continue to help support prices and retrace the gains we saw today?
A: I mentioned earlier that commodities were in a process of bottoming, but I really didnt expect to see any material gains probably until Q4. So yes, you do have Norway losing maybe 255,000 barrels a day. The Iranian situation, as you have pointed out, is there. So on the supply side there are some reasons to be optimistic.
The big question is about demand. How will the economic situation in the US, Europe and China spur demand? In the US, gasoline demand has fractified. The prices have come down substantially. Gasoline demand is still running well under the year-ago level.
So I don't think the demand side of the equation is that strong and to have a really solid bull market, you need to have a demand-based gain. Supply will help, but you really need demand to get the markets really moving in a steady fashion.
Q: So you estimate WTI NYMEX at around USD 80 per barrel and maybe Brent at around USD 90 per barrel. Is that a fair assessment of how you expect prices to stabilise?
A: Yes, the technicals on crude, even with today's rally, still indicates it could move lower to USD 74-75 per barrel. Another factor is that there is so much news out there that the charts are not necessarily the determining factor, but I don't expect prices to go much under USD 75 per barrel. So, crude prices are close to bottoming sometime soon.
Gold is the big surprise today with a USD 50 rally. It's become a sczheopherinic market- one day it's very strong and the next day it isn't. I am bullish on gold. I think when you take the entire global situation whether it is Europe, Asia or the Federal Reserve, there is going to be a reflation, and I think it all bodes well long-term for gold.
The price of USD 1,530 was a very key support level held during this week. So, I like the outlook on gold.