SINGAPORE (Reuters) – Oil’s sharp two-month decline is likely to end soon as producer cartel OPEC will probably cut production once prices dip below $100 a barrel, the head of commodities research for Credit Suisse said on Wednesday.
Production curbs should keep prices between $100 and $110 for the rest of this year, while grain markets should rally as traders look past positive short-term weather conditions towards the bigger longer-term risks to world food supplies, Tobias Merath told Reuters in an interview.
“On oil, I think the bulk of the correction is behind us,” Merath said. “We think it can test $100 or drop slightly below it in a couple of weeks, but it should not remain below $100 on a sustained basis.”
Oil has tumbled more than $6 since Friday, touching its lowest in five months after early signs that a weakened hurricane Gustav caused little damage to U.S. oil installations. On Wednesday, U.S. crude fell 52 cents to $109.19 a barrel, extending its nearly $40 slump since its July 11 record high of $147.27.
Merath said weaker demand for crude oil from the United States and OECD countries in recent months has offset higher demand from emerging markets, keeping overall consumption flat.
“At the same time, OPEC countries are producing quite a bit of oil since March and that is apparently working. But the moment oil drops below $100, they will be quick to cut back production,” he said. “We expect a recovery in oil prices in 2009. We expect prices to hover between $115 and $120 in 2009.”
The OPEC next meets on September 9 in Vienna. Most commentators have predicted it would leave formal output targets unchanged, but there have been calls from within the group to rein in production above official ceilings.
FOOD CRISIS NOT OVER YET
Merath added that the outlook for grains and oilseeds remained positive, with gains of more than 10 percent expected by the end of next year, while industrial metal prices would remain weak until the end of this year and would start recovering only when world economic growth started picking up next year.
“We think that the food crisis is not over yet. The market is reading in too much into the positive effects of good crops. Yes, there are good crops in the pipeline but we should forget that we have floods in the Midwest and adverse climatic conditions in Australia,” he said.
“For wheat, corn and soybeans, we expect the market to be at least 10 percent higher than the current levels by the end of next year,” he said.
On gold, Merath said the sharp fall in the price of gold has generated interest in physical buying among jewellery makers, which, along with relatively lower interest rates, should be able to support prices at current levels.
Spot gold has rebounded to around $800 an ounce after striking a nine-month low around $773 in mid-August, but is still well below a lifetime high of $1,030.80 hit in March.
“We don’t expect any interest rate hikes anytime soon. Australia is the most recent example of countries cutting rates. Lower yields will be positive for gold,” Merath said.
“Prices of around $800 is seen as a bargaining opportunity for physical consumers. We see the market recovering to $900 by the end of the year, and the market will be between $950 and $1,000 by the end of next year,” he added.