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Budget 2021

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Increased production from Libya, optimism over Iran oil likely to keep a lid on crude prices

The faster spread of a new coronavirus strain of the UK and the new level of travel restrictions are likely to keep oil consumption lower.

January 07, 2021 / 11:32 AM IST

Abhishek Bansal, Founder-Chairman, Abans Group, expects gold to outshine equities in 2021 as well, carrying forward into the new year its safe-haven appeal, while low interest rates will keep borrowing costs lower for the precious metal.

For crude oil,  the new year should be better but the market is well supplied for now. In an interview to Moneycontrol's Sunil Shankar Matkar, Bansal says the new coronavirus restrictions in the UK and other European countries along with increased production from Libya will keep crude prices in check. Edited excerpts:

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

Brent oil prices, which dropped to $15.98 per barrel in April 2020, have bounced back sharply and are holding above $50 per barrel but this is still 22 percent lower than the last year. The recent bounce in crude oil prices has been supported by optimism over a coronavirus vaccine and the new stimulus measures in the US.

Faster-than-anticipated vaccination programmes across the globe are seen as a positive step. OPEC has revised its growth estimates for the world economy. As per OPEC's December report, it sees a contraction of 4.2 percent (YoY) in 2020 and a 4.4 percent growth forecast for 2021. World oil demand was projected to drop by 9.77 million barrels per day (mb/d) and remain at 89.99 mb/d in 2020, however, it is projected to reach 95.89 mb/d in 2021. On the supply side, the EIA forecasts OPEC crude oil production to average 27.5 mb/d in 2021, up from an estimated 25.6 million b/d in 2020. OPEC projects Non-Opec liquids production to an average of 63.52 mb/d in the year 2021. The main drivers for supply growth are expected to be the US, Canada, Brazil, and Norway.

Close

However, demand-supply fundamentals still suggest that the oil market is well supplied. We can expect the markets to react to these facts at a later stage. US crude inventories stand +10.7 percent above the seasonal five-year average, gasoline inventories stand +4.6 percent above the five-year average and high distillate inventories are +10.8 percent above the five-year average. The market is even ignoring the rising number of coronavirus infected cases globally and the implementation of newer restrictions in many countries, along with the US, Europe, and the UK.

Along with these factors, increasing production from Libya and optimism for Iranian oil after Joe Biden's victory in the US presidential election is likely to keep a lid on oil prices. The faster spread of a new coronavirus strain in the UK and the new travel restrictions are likely to keep oil consumption lower.

Q: Gold gave a return of  23 percent in 2020. Do you expect a similar performance in 2021 as well and why? What is your outlook for the metal and will it continue to outperform equities in 2021?

The coronavirus pandemic is looking far from over soon and its impact on economies is likely to be seen at least till the first half of 2021. Gold prices have seen a nearly 23 percent return in 2020, which is the best year since 2010, due to the huge stimulus measures by the world's leading economies, and ultra-low interest rates across the globe.

However, physical gold jewellery demand was not encouraging in 2020 due to multiple lockdowns and social-distancing norms. Globally, investment demand has grown significantly. According to the WGC (World Gold Council) report, global investment demand for gold (incorporating retail investment in gold coins and small gold bars as well as inflows into gold-backed ETFs) reached 1,630.2 tonnes in the first nine months of 2020. This was 63 percent higher than the same period in the first nine months of 2019 at 1,000.8 tonnes. Seeing the worsening situation of the pandemic, we expect a similar trend to continue in the first half of 2021.

We expect gold prices to remain firm and are likely to outperform equities in 2021 as safe-haven demand remains intact in the current scenario and ultra-low level of interest rates are likely to keep borrowing costs lower for gold for the much longer-term than what had been anticipated earlier.

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?

Base metals have witnessed a positive year despite several trade concerns and economic contractions in 2020. LME copper is leading the tally, up by 26.1 percent, followed by zinc (+20.1 percent), nickel (+19 percent), and aluminium (+11.5 percent), while lead (+2.8 percent) becomes the worst performer among all.

Copper is the top performer due to a significant turnout in physical demand in China. Copper inventories at LME have dropped by 37,750 million tonnes (mt) in 2020 and were at 1,07,950 mt as on December 31. Inventories at SHFE have also seen a drop of 24,246 mt in 2020 and stand at 33,433 mt. Copper inventory has dropped nearly 44 percent of the current stock at SHFE and LME altogether in 2020.

The rally in zinc was a result of (several) factors such as a tight concentrates market, the closure of Vedanta's Gamsberg mine in South Africa and a significant drop in warehouse stocks at LME and SHFE. Prices are also up after demand prospects improved due to the rollout of vaccine in many countries and also the passing of the second round of stimulus measures in the US.

Rebound in economic activity in China, followed by a V-shaped recovery after a drastic drop due to the COVID-19 pandemic, strict lockdown implementation measures, and government-led stimulus measures along with an expansionary monetary policy action from The People's Bank of China have supported this move in base metals. Global green energy initiatives are supporting robust demand for electric vehicles and are likely to keep nickel, copper and aluminium prices firm in 2021.

Q: What is your outlook on natural gas?

Although poor domestic consumption in the US kept natural gas prices lower during the last three months of 2020, however, increasing export demand from Canada is likely to support prices in 2021. US heating demand during winter has dropped significantly. According to forecasting agency, Maxar, it is the 13th warmest winter for energy demand, going way back to 1950, and the Climate Prediction Centre has said that this year's La Nina weather pattern is leading to warmer-than-normal winter temperatures from California to Florida, which will reach up to the East Coast.

The EIA expects that US consumption of natural gas to average 83.4 billion cubic feet per day (Bcf/d) in 2020, which would be down 2 percent from 2019. However, rising exports to Canada are likely to keep natural gas prices supported. The EIA forecasts that US LNG exports will exceed 9.5 Bcf/d from December through February, and will average 8.5 Bcf/d in 2021, which would be a 30 percent increase from 2020.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Jan 7, 2021 11:32 am

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