Moneycontrol

Budget 2021

Associate Partners:

  • SMC
  • Samsung
  • Volvo

Moneycontrol

Budget 2021

Associate Partners:

  • SMCSamsungVolvo

'COVID vaccine rollout, hopes of increase in fuel demand to drive crude oil prices in 2021'

WTI Crude oil prices will move higher towards $65 a barrel in 2021 while MCX oil prices will move higher towards Rs 4,500 mark in the same time frame.

January 03, 2021 / 09:05 AM IST

Oil prices will be like a pendulum in 2021. It will depend on how the infections are contained on one hand and the global rollout of vaccines on the other, which will be the push and pull factors respectively, said Prathamesh Mallya, AVP- Research, Non-Agri Commodities and Currencies at Angel Broking in an interview to Moneycontrol's Sunil Shankar Matkar.

Mallya feels WTI crude oil prices will move higher towards $65 a barrel in 2021 while MCX oil prices will move higher towards Rs 4,500 mark during the same time frame.

Edited excerpts:

Q: Base metals rallied sharply in the past several months given the recovery in China and other counterparts globally, weak US dollar etc. Do you think the rally will extend in 2021 too and why?

While the world struggled to tame the implacable virus, a host of positive data sets from China, helped the recovery in the base metals complex. After witnessing the worst fall in the first quarter of 2020, China's economy saw a bold recovery which made industrial metals the perfect investment option for global investors.

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COVID-19 Vaccine

Frequently Asked Questions

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How does a vaccine work?

A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.

How many types of vaccines are there?

There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.

What does it take to develop a vaccine of this kind?

Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.

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China's GDP (YoY) cooled down to -6.8 percent in Q12020 (the first quarterly decline in GDP since 1992) from 6 percent reported in the last quarter of 2019. The spread of the coronavirus, which originated in Wuhan, the capital of Hubei Province, in China passed out to most parts of the nations which led to the fall in GDP numbers. However, China successfully contained the virus outbreak and commenced its road to recovery from the second quarter of 2020.

China's impressive journey was primarily driven by the enormous stimulus package announced by the government. While most nations directed the stimulus support towards helping the workforce, but China's deal (a 3.6 trillion yuan {$500 billion} fiscal stimulus package in May 2020) aimed at boosting investment expenditure. The annual special bond issue by China which is focused on the funding of the infrastructural project was set at 3.75 trillion yuan ($535.33 billion) for 2020.

A surge in construction and infrastructural development was China's plan to overcome economic turmoil. With a flurry of infrastructural projects, domestic demand increased which layered a base for the comeback of the world's biggest metal consuming economy, China.

The robust revival was evident in China's industrial profits (YoY), Manufacturing & Non-Manufacturing PMI, monthly auto sales and GDP figures.

Strong demand from China outpaced all the global worries and helped most base metals post double figures gains in 2020. This will continue in 2021 also with momentum in favour of metals.

Nickel entered the year 2020 with huge bets as top Nickel producing nation, Indonesia, announced an export ban since January 2020.

Despite worries of shortage in the global Nickel market, prices plunged more than 21 percent in the first three months of 2020 after the impact of coronavirus containment measures and lockdowns intensified.

Steady growth in supply from major producers amid dented demand outside China landed the global Nickel market in a surplus of 11,06,300 tonnes in the first ten months of 2020 compared to a deficit of 40,700 tonnes during the similar period in 2019. (as per data from the International Nickel Study Group).

While the growing surplus was a considerable headwind for Nickel, rising stainless steel production and the booming Electric Vehicle segment layered the base for recovery.

China and all the major economies boosted the infrastructural spending in an attempt to combat the pandemic triggered slowdown which boosted the demand outlook for Steel as well as Nickel, its primary raw material. China’s steel production hit record highs in 2020 due to the flurry of infrastructural projects to rescue the falling economy.

While the stainless steel segment continues to be the demand driver for Nickel, the Electric Vehicle (EV) market is soon expected to steal the limelight. With the world moving towards green transportation, demand for Electric vehicles is expected to proliferate in the years to come.

Booming China's stainless steel production and growing Nickel demand from the EV sector are the major pillars of support for the prices. However, significant growth in China's output might result in a possible surplus in the global markets.

All the major automobiles manufacturers are moving towards electric vehicle’s (EV) considering the rising environmental problems. Booming growth in the Electric Vehicle segment will support the Nickel prices in 2021.

Q: Crude oil prices gradually climbed above $50 a barrel in December and sustained above the same level so far. Do you expect the commodity to hit $70-75 a barrel on the Brent futures in 2021 and why?

Ultimately, the outlook for the oil market will depend on how quickly governments move to contain the coronavirus outbreak, how successful their efforts are, and what lingering impact the global health crisis has on economic activity.

According to the International Energy Agency estimates, a contraction in 2020 will be followed by an expected sharp rebound in 2021, however, global oil demand growth is still set to weaken on annual basis as consumption of transport fuels increases more slowly.

Strong growth in Asian oil demand will create major opportunities for oil-producing countries that can boost exports. But growth in non-OPEC production is set to lose momentum after a few years, indicating a greater role for OPEC+ countries to maintain stability in the oil markets.

Oil price rise from hereon will be a combination of vaccination rollout across the globe along with hopes of an increase in fuel demand on a global scale.

The efforts by the OPEC to balance the oil market has yielded good results with increasing oil prices since the March lows, the optimism has to continue in 2021 also and the number of COVID-19 infections also has to slow down further if oil prices have to maintain the growth momentum going.

The equilibrium in the oil markets is poised in the state of oversupply due to the demand destruction caused by the pandemic. The resurgence of COVID-19 in its second wave in Europe and North America might further worry the recovery in oil markets while the demand recovery will falter much faster than most anticipate.

In November 2020, the world received the exciting news that the first COVID-19 vaccines were ready for roll-out, and as of now, nearly 7.25 billion doses have been pre-purchased by countries and organisations around the globe.

Without COVID-19 vaccines, health and safety measures such as social distancing and self-isolation would likely stay in place for the foreseeable future. A future where life is somewhat back to normal is on the horizon, but some countries are set to get there faster than others.

So the oil prices are like a pendulum in 2021 depending on how the infections are contained on one side and the global rollout of vaccines on the other side, which will be the push and pull factors, respectively.

WTI Crude oil prices will move higher towards $65 a barrel in 2021 while MCX oil prices will move higher towards Rs 4,500 mark in the same time frame.

Q: Gold has given strong return of 23 percent in 2020. Do you expect similar kind of return in 2021 too, and why? What is your overall outlook on yellow metal? Also will the gold continue its outperformance over equities in 2021?

There is no change in the policy of central banks going in to the New Year and rising COVID infections is a cherry on the cake for global investors to increase their interest in the yellow metal.

Although there are major revisions to the global GDP growth numbers and there might be some green-shoots of recovery in 2021, the risk of slowdown continues to persist with a third wave of infections in US and Europe.

We live in an optimistic world and the hopes of early vaccine in some of the countries have brought in a ray of hope.

Britain became the first country to approve the vaccine candidate developed by Germany's BioNTech and Pfizer Inc, jumping ahead of the rest of the world in the race to begin a crucial mass inoculation programme.

US health regulators have approved distribution and administration of the vaccine in mid-December. Africa aims to have 60 percent of its population vaccinated against COVID-19 within the next two to three years, according to the African Union's disease control group.

A flurry of positive vaccine news has helped drive a rally in riskier assets, while actions taken by the Federal Reserve continues to weaken the dollar.

Whatever is the situation, there is more room for gold and silver prices to move higher in the coming months.

We forecast Comex Gold prices to trade higher towards $2,500 an ounce in 2021 while $1,800 will act as a stronger base, the psychological support.

MCX Gold price is a combination of two factors, international price moves and rupee movement.

For investors in India, Rs 48,000 will act as an entry base point for a target higher towards Rs 60,000 per 10 gms.

There is flush of liquidity in the global economy and this liquidity will chase for higher yields and what better than equities. However, if equities will beat gold returns is a thought that is difficult to answer at this point as the outcome of this is dependent on how uncertain the global world remains in 2021.

4: What is your outlook on natural gas?

Natural gas is a traders' paradise and genuine advice from us is to stay away from this commodity because of excessive volatility. However, if the risk appetite of investor is high, natural gas is a commodity that can be played for. This commodity is not meant for investment in real sense.

5: What are the key risks and positives to play a crucial role in non-agri commodities in 2021?

Risks
1) Rising COVID-19 infections
2) Central banks withdrawing easy money policies
3) US-China trade war

4) Currency war are key risks to play a crucial role in Non-Agri commodities in 2021

Positives
1) High liquidity chasing for higher yields
2) Resumption of manufacturing activity across the globe

3) Less and reduced risk of infection due to vaccines and inoculation programmes

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar

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