Crude has potential to go back to $100/bbl: MIG Invst

Bad news are coming from the macros as well; crude has gone past USD 145 per barrel mark and a rate hike is hovering over the European zone. In the midst of all this, where are crude and other important indices headed?

Richard Morrish of MIG Investments said if the USD 147 per barrel level is broken, then crude is slated to touch USD 156.85 on October 8, at which point there would be a very sharp correction.

He sees a potential for it to go all the way back to USD 100.

Excerpts from CNBC-TV18's exclusive interview with Richard Morrish:

Q: Where do you see crude? Now having crossed USD 145 what are the next targets that are coming into view?

A: The answer on this is back home at CNBC Europe beginning of this year, we had target USD 147 for the price of crude during the course of this year and we are very close to that level now. The problem is if that level is removed then the next high in the market is indicated as USD 156.85 which should be made on the October 8 and at that point we would then expect to see a very sharp correction in the oil price, which should drop back then around USD 120 level.

But we are getting very near to the peak in the price of oil and we are getting very near the end of this. When the correction comes it would be deep but it would be a consolidation of maybe six-eight months because our next target is oil price of USD 204.28.  

Q: The next six-eight months when you see crude getting a deep cut, what kind of lows may it touch?

A: If it starts selling off either from the USD 147 level or later in the year at the USD 156 level, we would expect it to get back to at least USD 120. There is a potential for it to go all the way back to USD 100. The market have a tendency when they get overstretched like this to come back and give people another chance to get into the market and this is rather like when we saw gold in 2005 at USD 737 per ounce level, we pulled back to USD 565. Everybody told the commodity boom is finished. But it’s just a stepping stone before you get the next big part of it.

The oil story and the commodity story a far from finished. We are expecting one of these deep set backs to come into the market. That will probably come around late July or beginning of August we will start seeing some peaking and some tight entire trading days, then you will start seeing the pullback come in the market which takes it towards the end of the year starting to come off, but again you start seeing base in around the October-November time again.

Q: What would be the trend between now and October? Would it be very volatile within a narrow range between USD 145 to USD 156 per barrel or would it be basically a consolidation?

A: I think there would be more consolidation. Volatility will remain very sharp in the oil prices. I think what we will be looking at going forward, is it is going to start to bite into America and the demand side will start easing slightly. It is not so much the case for India and China and the other BRIC countries. The demand will keep coming there.

Q: So what would therefore be your views on the Sensex or the Nifty, the Indian indices? How do you see them panning out for the rest of 2008?

A: I think if you look at the Nifty, it is in a real problem and it has got to hold up where we are at the current ranges. 3,873 puts this market in all kind of trouble. If the market breaks there, we would expect a very sharp decline to 2,902, and that decline would come within a month or so. So it is important that the Nifty does hold on to the current levels.

On the Sensex also, the market is in a long-term bull trend. All these drops and corrections that we are seeing are just that - drops and corrections - but they can be exceptionally violent. And we are expecting wholesale problems in the general global equity markets. India in particular is probably going to see some pretty violent downside movements coming through still.

Q: How critical are the next few sessions given that the Dow is right now at bear market levels?

A: I think quite honestly, I wouldn’t be at all surprised to see the Federal Reserve start to come through the door with another interest rate cut to protect them. 11,090 on the Dow Jones in particular is critical for it; if it breaks that, then the market goes into an accelerated bear market which would target the market down to 9,007. Last week or a week before, we sent out a signal to our clients that if the S&P crosses 1,301, it signalled the worst patterning for the American markets since September 11. And with that precursor, it definitely could drop down to the 7,750 level.