Commodities may not see peak levels for next few years: RBS

However, he does believe that they do have decent upsides from current levels. “When you are looking out for Q4 next year, we expect double digit gains across the board,” he said in an interview to CNBC-TV18.

Kavalis places his top bets on palladium and copper along with aluminium and nickel. He explains that copper and palladium look strong fundamentally, while the aluminium and nickel have technical factors going for them. “We think that they have been oversold, so we think there is a good upside potential for both metals,” he explained.

For the near-term, he expects crude oil to lose its shine further because of supply tightness in the market having subsided. He sees Brent crude average around USD 110 a barrel by the fourth quarter.

Also read: UBS sees Brent crude fall below USD 90/bbl in near-term

Below is an edited transcript of his interview with Latha Venkatesh and Ekta Batra. Also watch the accompanying video.

Q: It seems like the FOMC has fallen a tad short of market expectations. How exactly do you see commodities responding to the FOMC?

A: I believe that given a lack of good news from the Fed, commodity markets will have to sell off and then look for the next signal in the market. Crude will most probably take a hit as well. I should point out that crude has already lost quite a lot of its shine because of expectations of severe tightness in the market having subsided.

Remember earlier in the year, even though fundamentals for the crude market showed that it was over supplied, its price rallied on the back of a perceived market shortage coming up because of Iran. I think these fears have now considerably subsided in the market and so we have already lost most of what is there to lose. In the medium term, we are actually very constructive for oil. We expect the price will average comfortably above USD 100 a barrel in Q4.

Q: There are some who argue that the commodity super cycle that began in 1999 is probably over. Do you think we won’t see commodities go back to the same highs in 2012 that we already saw in the earlier part of the year?

A: I think commodities still have a decent upside, but I would definitely agree that the kind of gains that we saw few years ago is now behind this. Our own forecasts are showing that we are not going to come back to the peak levels for most of the metals as well as crude oil over the next couple of years.

Having said this, there are very decent gains that we expect will be seen for metals and for crude oil. When you are looking out for Q4 next year, we expect double digit gains across the board.

Q: What will be your top commodity bets at this point?

A: This is a tricky question. From a fundamental stand point I really like palladium. We think it has the best fundamentals across base and precious metals. It is a market that has been structurally under supplied and the gaps have been filled by sales from Russian stock piles and we expect these sales and stock files to collapse this year and eventually disappear.

We also like copper for the year and a half. We think the market will remain in a deficit, although further down the line this would be reversed.

Even though we don't like them fundamentally, from a pricing point of view, aluminium and nickel have over supply and we think that they have been oversold, so we think there is a good upside potential for both metals.

Q: Is there a chance that with commodities showing signs of tiredness, the pace of financialization of commodities itself declines and therefore you could see fall in commodity prices?

A: I actually disagree with you. I don't think that the financialization of commodities will decline. What I think you will see though, and you're already seeing it, is a change from the strategy that we had earlier up until 2007-2008 of the commodity bet being one way and consistent across over sub assets.

From a long only strategy across the board to a far more strategic long-short, where in you try to figure out what the good RV pairs are to play and which commodity one should go long or overweight and which short or underweight.

Q: Crude actually has been quite a rank underperformer, especially in the past eight weeks. In this current scenario which Brent crude is trading in, do you see further falls?

A: I think a little background is due here. I think the decline we have seen in crude prices has been very much linked to the concerns towards Iran. I think from this point onwards we are quite constructive towards Iran and this mostly on the back of the fact that we expect demand will recover later in the year as the global economies start to pick up.

Another important factor is the supply side. Earlier in the year we had OPEC ramping up production in many ways to ease the concerns of falling supply from Iran and you are already seeing signs of this reversing. The latest oil marketing report from the International Energy Agency saw a slight decline in Saudi production and I wouldn’t be surprised if we saw more of that to come.

Q: Do you think that Brent crude will possibly be below USD 100 for the better part of 2012?

A: No. We actually expect the Brent price to rally. For Q4, our average target is currently USD 110 per barrel.