(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)HUSSEIN ALLIDINA, HEAD OF COMMODITY RESEARCH AT MORGAN STANLEY, TALKS ABOUT OIL PRICE ESTIMATES ON BLOOMBERG TVAUGUST 31, 2010SPEAKERS: HUSSEIN ALLIDINA, HEAD OF COMMODITY RESEARCH, MORGAN STANLEYSCARLET FU, REPORTER, BLOOMBERG NEWS
SCARLET FU, REPORTER, BLOOMBERG NEWS: Oil prices fell nearly 10 percent in August, and a deteriorating U.S. economy has some concerned that crude could fall even more. But not Morgan Stanley. That firm’s team is expecting oil to hit $95 a barrel by the end of the year.
So here now to explain their call is Hussein Allidina. He is Morgan Stanley’s head of commodity research.
And Hussein, you’re saying that on the one hand, there’s a fundamental explanation for why oil could rise. But also, there’s one that has to do with trade flows, correlation with the overall risk trade or risk aversion trade. Why is correlation a bigger factor right now?
HUSSEIN ALLIDINA, HEAD OF COMMODITY RESEARCH, MORGAN STANLEY: Absolutely, Scarlet. I think if you take a look at what’s evolved over the course of the last twelve, sixteen months, risky assets have, broadly speaking, been highly correlated.
We don’t expect those correlations to fade any time in the near future. But our constructiveness into the end of the year stems from both an improvement in the fundamentals, the supply and demand, coupled with an appreciation in risk appetite.
Morgan Stanley’s economists are broadly constructive here on global growth despite the concerns in the U.S. And ultimately we believe that does contribute to lifting risky assets, as well as supporting commodities like crude oil.
FU: Okay, so we’ve said $95 by the end of the year. But you say $74, which is where crude is trading today, is basically the bottom. And to break below that, we would have to see a double dip. But you don’t see that happening.
ALLIDINA: Admittedly yes, the $95 is a little bit aggressive into the end of the year. Directionally though we do believe crude moves higher.
Nothing goes up in a straight line. In the near term, we’re going to see some concern as refiners here in the U.S. go down for maintenance. That will pressure crude spreads as crude demand is tempered.
But heading into the back half of the year, things do look quite good. I think the picture today is somewhat masked. Demand is actually doing quite well. Demand from the lows is up over 3 million barrels per day. We’re only 1.3 million barrels per day away from the all time high reached in the fourth quarter of ’07. So continue to believe that the (inaudible) is constructive.
FU: Okay, the demand story may be robust, but what about from places like China where the government is actively trying to slow down the economy?
ALLIDINA: Yes, absolutely, Scarlet. If you take a look at where China is focused on reducing their energy demand, it’s largely in the industries that don’t in fact consume quite a bit of crude oil and or products. It’s focused in coal and other sectors.
Five percent roughly of the targeted industries consume crude or derivatives of crude.
FU: And talk a little bit about inventory. As we mentioned the demand side, supply is higher than you had expected, currently at record highs. But you say that’s actually misleading.
ALLIDINA: Well I think if we look at the IEA data or the EIA data, it masks the fact that quite a bit of floating storage has actually come off of tankers. That floating storage was there last year as well, but not captured. Today it’s being captured in the onshore data, the DOEs that come out every Wednesday, or the IEA’s monthly data.
We’ve lost about 20 million barrels just in August from floating storage. And tertiary inventories in places that are not captured in the data, like in Germany for example, are also down about 20 million to 22 million barrels year on year.
FU: Okay, let’s move our focus to some other commodities. Let’s mention wheat really quickly, because the drop in supply from Russia certainly affecting prices there.
How much visibility do you have on wheat right now?
ALLIDINA: A lot of uncertainty on wheat. We’re telling investors to play the wheat story in fact through corn.
The wheat story is very much a weather issue. The spring wheat in Russia has been devastated, owing to the hot weather. The winter wheat - now this is the critical thing. The winter wheat gets planted October and November. And to the extent that conditions do improve, they get a little bit of precipitation, that wheat gets planted, wheat prices should come off.
You play it through corn instead because any disruption in wheat will benefit corn - exports, U.S. corn exports, et cetera. And ultimately we do have a constructive corn balance, even without a wheat issue.
FU: So corn is the way to go in the grain space?
ALLIDINA: Absolutely. Morgan Stanley is advising their investors to take length in December 11 corn. It’s trading around $4.47 right now. And I think that can move well north of $5.00.
FU: Okay, we thank you for your time. We’ve been speaking with Hussein Allidina. He is head of commodity research over at Morgan Stanley, calling for crude to hit $95 a barrel by the end of the year.
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