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More chance of oil price touching $60 at year end: Geoff Dennis

Risk of full-scale conflict between US and Iran quite small and global economy softening, says Dennis.

ET Now|
Updated: Jun 24, 2019, 10.38 AM IST
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We have got more chance of oil ending up near $60 for Brent at the end of the year than $70, given that the underlying tone of the global economy is softening and that ultimately will be the biggest driver., says Geoff Dennis, EM Commentator. Excerpts from an interview with ETNOW.

We have seen how the markets have reacted on the back of the US-Iran tensions. US-China relationship has been a big overhang for many months now. How bad is it right now? Is there anything to worry about with respect to markets and crude oil prices in a medium to longer term?
One should worry more about the US-China trade war. It is going to linger on for some time and may well get worse before you get some sort of resolution. There is a possibility of a military conflict between the US and Iran and concerns over oil supplies due to developments in the Strait of Hormuz have pushed up oil prices recently.

But at the end of the day, the US and Iran will pull back from the risk of real military conflict and although tensions will remain high and new sanctions probably get imposed on Iran this coming week, long term it is still the US-China trade story that will dominate.

But the good news is that at least on Sunday Donald Trump said that he was not seeking war with Iran after an Iranian military commander warned of any conflict in the Gulf region could spread uncontrollably and threaten the lives of US troops. Iran is also saying they want to ease the tensions. How do you see them coming on to a mutual agreement?
That is a geopolitical question. I am not sure I am qualified to answer that. But the best thing to say is that President Trump has got a history already in his two-and-a-half years in office to have actually threatened some severe action and then pulling back at the last minute.

Although he has got some very hawkish members of the cabinet pushing for more aggressive terms towards Iran, at the end of the day what probably comes out of this is more sanctions on Iran and possibly down the road some talks between the US and Iran. But the risk of a full-scale conflict between the US and Iran is probably quite small and the markets are right to price that out. Markets have been stable, a little softer over recent days. The way in which it comes out in the short to medium term, possibly will put further upward pressure on the price of oil.

What will be the impact of all this geopolitical tension and US-China trade talks on the emerging markets? They are likely to meet in G-20 but how will the EMs actually react to this news?
What is interesting is if a) we are at peak US-Iran tensions which we probably are and b)if Xi Jinping and Trump meet at the G-20, we would not get any worsening of the trade war which is a fair bet at the moment. I am sure it is going to get better but whether it will get worse is debatable. Emerging markets will come back to more conventional things.

Obviously, in the last few days, you have seen a fairly decent move down in the dollar and that is because of the perception of the Fed about interest rate cuts which look likely to happen in July. That will pull the dollar down and there will be some flows back to EM.

Without any major escalation of these two international situations, this is a reasonable assumption to make. You should see emerging markets do fairly well, unless the US economy is heading for a recession and then it will all get more complicated.

What about oil if you could offer some commentary on how the oil prices have surged in the backdrop of how the tensions have escalated between the US and Iran, Brent is already about $65 a barrel, where do you see it settle perhaps by the end of this year?
I suspect that this is just a political premium or perhaps a risk premium that has been put in there. If you see some easing of tensions between US and Iran, oil prices will come down again. This is because the global economy is soft and the selloff in oil since initially in September and then since April it is probably the trend that we are heading for. That is the true medium term trend. We have got more chance of oil ending up near $60 for Brent at the end of the year than $70, given that the underlying tone of the global economy is softening and that ultimately will be the biggest driver.

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