Speculative influence is making it impossible to predict where the rampaging oil price will go.

Bruce Whitfield:
One, two, three and I am not showing off the fact that I can string off a sequence of numbers in the right order. I am simply quoting the sort of price that Brent crude oil has been trading at recently $123 a barrel, around that level today.

We had Goldman Sachs forecasting an oil price of anything between $150 and $200 a barrel between the next 12 to 24 months. And by way of illustration, SABMiller yesterday reported that its fuel bill year on year is 40 percent higher than it was. Now ultimately, that translates for you and me, the price that we have to pay for every beer we consume. You may not feel the pain that many of us feel, but certainly do notice that beer prices are going up and ultimately other classes of food and products we consume go up as well.

Amit Juneja is with the Standard Chartered commodity derivatives trading team and he is usually based in Dubai. Amit, it is good to have you in South Africa. You are in a region which is at the centre of the global oil industry. Now if you look back, do you think even in your wildest dreams that you could have forecast what the oil price is doing right now?

Amit Juneja:
Thanks Bruce. I don’t think many people would have been able to forecast the price that we are currently paying for oil. In fact, most analysts base their forecasts on fundamentals and what is happening today in the market is the fundamentals are changing, there is also the speculative front that is coming on top which is really driving the market.

Bruce Whitfield:
Now for a moment, pause if we can. Just explain what the difference would be between basing your expectations on oil price on fundamentals and then the speculative element comes in and also the changing fundamentals. Elaborate a bit on that.

Amit Juneja:
Sure, if you just purely look at fundamentals and you focus as the market has been playing over the last few years, purely on physical demand and supply. But the moment you start looking at the speculative element, then you are talking about the trading that takes place on exchanges.

Now, that trading never takes place on its own. It has always got an underlying element that is driven by the fundamentals. So you have the fundamentals that create the foundation. On top of which you have the speculative interest driving the floor in. Now speculative trade is leveraged trade, we call it. You pay margin money and you can start trading. That allows you to trade a lot more without actually having an actually physical underlying contract.

Bruce Whitfield:
So the impact is it could be 10 times more than the actual physical trades they are actually reflecting?

Amit Juneja:
Absolutely, absolutely, and that is really what has been driving the market. And you have also got influence which is the new money, as we call it, is our jargon, starting to flow in the commodities. There are more pension funds, more hedge funds, and more funds with a lot of liquidity looking for a place to park their money. And it is a snowball effect, as commodities do well, there is even more money coming in to push commodity prices higher. And it is definitely oil prices.

Bruce Whitfield:
Now fundamentals are fine. We can deal with that. X million barrels of oil are produced a day. X million are consumed a day. There is roughly a balance probably between those two things. But suddenly you add speculation into that mix, you add the leveraging into that mix as well and forecasting in the traditional sense goes out the window.

Amit Juneja:
Absolutely, it becomes very hard. Nobody can predict what the speculative influence will be because you cannot predict when funds will suddenly divert their money into a specific commodity. It is impossible to do that.

Bruce Whitfield:
Now when you look at the Goldman Sachs forecast that came out about a week or two ago. They are talking about 150 to $200 a barrel for oil within 12 to 24 months. They were right before when they said oil would hit $101 or whatever the figure was, are they right again in your view? Or is it just impossible to tell?

Amit Juneja:
Personally I would say that it is very difficult to tell whether oil will really get to 200 bucks a barrel or even 150. But what I would do is, take a look at what the noise in the market is and what the chatter in the market is. And if you have Opec also saying the same thing and targeting that level, there is a good chance that oil could get somewhere in that range.

You have got a few key geopolitical issues currently taking place. The major one is Iran where you have got sanctions on Iran and it is one of the leading producers of oil today.

There is rumour in the market that there is a lot of Iranian oil out there, it is just sitting on ships parked somewhere because nobody is allowed to buy it. I don’t know whether it is true or not, but if that is the case, then that is physical supply that has been taken off the market.

Bruce Whitfield:
Now if you look forward 18, 24 months, is the oil price more likely to be $80 a barrel or $150 a barrel?

Amit Juneja:
I there will surely be people who would argue that the oil price could head to $80 a barrel in the next 18 to 24 months. Let me bring you to another point. The cost of taking oil out is now rising because that itself requires energy. This is what is seeping into the system. It is raising all the costs. Stockpiling is taking place at a national level.

In the US they call it the strategy petroleum reserve and it is now also been set up in China and in India. Large economies are starting to create their own stockpiles of oil. So this is taking oil off the market and just storing it in tanks. So I think the pressure on oil seems to be on the upward side.

Bruce Whitfield:
Well we certainly know that stockpiling is going to have an impact in terms of limiting supply. But you talk about the cost factor and we know, been a mining country in South Africa just how the costs of mining gold, platinum, diamonds, absolutely everything we draw out of the ground, whether it be iron ore, those costs have escalated as well. Everyone is pointing fingers at everyone else.

But the oil industry is saying, our oil costs are that much higher because we have got to buy the steel to erect the oil wells and the guys providing the steel are saying, hold on a second, but it costs us so much more to get our steel to the oil well in the first place.

So you have this cycle and this round about going in terms of driving global inflation and that is the risk we are facing right now.

Amit Juneja:
Absolutely. As I have been travelling to South Africa, every customer I meet has the same issue to talk about and that is the rising price of oil. Everything has an oil component.

Bruce Whitfield:
We are talking to Amit Juneja who is with Standard Chartered. He is based in Dubai and he is in South Africa for a couple of days. And Amit, SAA for example, our national carrier was saying this week that it was doing its sums in the last year, based on its forecast of an average price of $65 a barrel. Now do we tear SAA apart for getting the forecast wrong or do you say well, $65 a barrel was probably not a completely way out expectation with the oil price. The fact that it has gone to almost twice that level already is not their fault.

Amit Juneja:
Well it is hard for me to comment on what line we should be taking. But put yourself in their shoes, it is very difficult for them to really predict an oil price. The market has doubled in the space of hardly a year, 12 months and there were analysts who were predicting this price in oil. So where do corporates go to get the right budgeted price for oil?

Bruce Whitfield:
That is a very good question. If you can give us the address please Amit, I am sure a lot of people would be very grateful.

We were talking about SAB earlier on as well. Their fuel bill is up 40 percent and recently there was an investment write, an American chap called John Morgan who joined us in out studio and he was bemoaning the biofuels industry because basically just saying biofuels are designed to try and alleviate our dependence on oil. However, the added implication there is suddenly that energy source is been removed off the food market and that is sending food prices rocketing as well. So we are getting ourselves caught in a very, very difficult catch 22.

Amit Juneja:
Yes that is absolutely true. There is a subsidy element in the US which is incentivising farmers to shift crops into the biofuel industry and that is taking food off the market and that is driving prices higher. But looking at food prices, there are other issues at play here also.

When you look at Asia, eating habits are changing. People, who are used to living on a meal a day or just two simple meals a day, are now getting increasingly wealthier and they are able to afford more meals number one. Number two, the type of meals that they are used to are changing.

There is a shift into eating more of meat. Now when you consume one kg of meat, there is almost five kg’s of grain or feed that goes into it. So instead of eating those five kg’s of (grain) of feed, which could have been consumed in the form of crops, you are now consuming just one kg of meat. That is a factor that is starting to affect the market as well.

Bruce Whitfield:
Now Amit, obviously lots of pressures building there. We are out of time. But can you give us any assemblance of hope when it comes to an oil price which his out of out control, is driving the inflation in the South African economy to a terrifying extent. Is there a light on the oil horizon?

Amit Juneja:
Well ultimately commodity markets all seem to as we call it, revert to the mean or mean rotation is a common phrase that we use. We can just hope that some of that speculative front will disappear from the commodity markets and will possibly find a new home.

Bruce Whitfield:
But why should it when there is so much money to be made out of speculation? That is the problem.

Amit Juneja:
The day the returns disappear then maybe commodity prices will settle down and they may find lower levels. But if not something in the near future and we don’t sense that happening in the near future.

Bruce Whitfield:
Amit Juneja, we must leave it there. Thank you very much indeed. He is with Standard Chartered, he works in their commodities derivatives trading team. He watches the oil price like a hawk and even he is not too sure where oil is going.