The current slide in oil prices may take the price towards $85 but it should find a strong floor at those levels, Kishore Narne of Motilal Oswal Commodity Broker says in an interview to Moneycontrol.
"Chinese Covid-related lockdowns have cooled off the premiums for now, but it doesn't eliminate the geo-political risk, which can drive the prices again rapidly as the global spare capacity is too low and makes the supply side very vulnerable," he reasons.
Motilal Oswal Commodity Broker believes inflation to be more structural in nature and could be sticky for some time which could put pressure on emerging market currencies like rupee, Narne with experience of 20 years in the field of Commodities and forex says.
Hence, they continue to be bearish on rupee with potential upside for USDINR till 82 levels.
Crude continued to trade at around $92-100 a barrel, even after the recent corrections. Do you see any possibility of it stabilising around $60-70 a barrel in coming months?
It is pretty vague to say that whether crude will reach $60 levels in the first place. Let's look at the fundamentals which are dictating the market at present. The first and foremost is the supply side concerns whether it is threatened by the sanctions related to Ukraine and Russia conflict or the inability of OPEC (Organization of the Petroleum Exporting Countries) to rise output due to constraints of infrastructure. The backdrop was pretty much dominated by the risks to supply till at least a month back.
But the recent correction of price showed the shift of the focus back on to the demand side. The concerns related to global economic slowdown or the probability of a recession induced by Federal Reserve has gained attention. A recent data from American Automobile Association (AAA) showed that most Americans are cutting back on their driving, the major organisations like IEA (International Energy Agency) and OPEC have downgraded their demand outlook for 2023.
This, along with Chinese Covid-related lockdowns have cooled off the premiums for now, but it doesn't eliminate the geo-political risk, which can drive the prices again rapidly as the global spare capacity is too low and makes the supply side very vulnerable. So in our opinion current slide may take the price towards $85 but it should find a strong floor at those levels.
Do you expect the gold prices to remain rangebound or to give double-digit return by August 2023?
Gold is not a typical commodity or a financial instrument, but it acts more like a currency and takes most of its cues from the largest traded currency which is the US dollar. As the Fed started its monetary tightening cycle before Covid, Gold peaked out and was looking for a major correction. But that got delayed as the Covid once again forced Federal Reserve and many other central banks to push liquidity and Gold benefited from it.
As we passed that phase and the central banks across the globe became more wary of Inflation rather that growth concerns the tightening cycle resumed across the globe and Gold in Dollar terms once again corrected, this time close to around 15 percent from the top.
But the Indian prices of gold has been resilient to this fall, as two factors namely increase of import duty by 5 percent and a rupee depreciation of over 7-8 percent has kept the domestic prices remain flattish over this period. We see that the inflation in advanced economies like US, would not be so easy to control and the Fed tightening would continue despite the recession fears and the speed of rate hikes would keep the pressure on gold prices, at the same time the tightening would also cause the Money flow back to the dollar causing emerging market currencies like INR to be under pressure which in-turn would help domestic gold prices.
This means the domestic gold prices could remain under pressure for some time to come. The tide may turn towards mid-2023 as the rates peak out and the growth concerns take the centre stage.
Do you expect significant rally in metals, after recent correction, in coming quarters with rising demand globally or once the recession fear gets over?
Economic booms and bust cycles are pretty large in nature and span over many quarters if not years. The recent correction in industrial metals was led by two major factors, the first one is the depleted demand from China as the factories were shot down in many parts of the country due to forced lockdowns and second is the fears of global recession induced by the monetary tightening.
Chinese are returning from lockdowns and the recent lockdowns are imposed in much more orderly manner to cause least amount of economic impact, which takes always the first factor. The other major issue was the chocking of global supply chains and even that started easing which is leading to easing of flow of commodities.
But the fears of global recession are still at the non-conformational state, as many economists continue to debate whether global economy shall be pushed in to recession or we have already entered one, remains to be concluded.
We do see that we are yet to see the full blown impact of the tightening of monetary policy and it would further weigh on commodity prices in coming months quarters. But for now we understand the inventories remain at near bottom levels and some recovery in demand is likely to push the metal prices up for short term.
But sustainability of that rally really depends on how far the central banks are willing to go and how severe the impact of higher rates would be on the global economy, which keeps any rallies capped.
What do you advise to retail investors or new-age investors who are very much interested to invest or trade in commodities but they mostly trade in equities?
Commodities are not wealth creation instruments. They are trading instruments to participate in tactical opportunities. They are least correlated with equity market and any portfolio with some weightage of commodities can perform better and provide better returns with low risk over longer term.
Retail investors / traders have and objective to maximise their returns with the capital they deploy. Equities stocks tend to follow larger trends emerging in the commodities space. The recent examples could be the run up in industrial metals, cotton, edible oils, which impacted large listed corporates and led to sharp movement in their stock price. Hence both the markets are largely interlinked and participants who can play both the markets have better chances to maximise their returns.
Secondly commodities have less number of instruments to track and trade and that too for a longer hours per day, which is a benefit for traders. And finally options in commodities are garnering very good traction which could be a big advantage for participants who are trading options in equities. The longer term investors can invest through direct participation physical commodities, or through ETFs along with derivatives available on commodity bourses.
With the renewed FIIs buying interest and rally in equity markets, the rupee stabilised and started trading above 80 against the US dollar. Do you expect the rupee to appreciate further or is the current depreciation a good sign for the fastest growing economy in the world?
Though FIIs influence short term sentiment in Indian rupee but their role is limited to short term movements. The larger trend of the rupee traces to crude oil price. With the recent rise in crude prices we have seen rupee depreciating to 80 levels and the stability and a slight appreciation after that was triggered by the correction in crude price.
As I said earlier though crude prices have corrected from their top, we believe that there are significant upside risks, with supply side so tight any disruptions could cause a serious price rise and trigger depreciation in emerging market currencies.
On the other hand we believe inflation to be more structural in nature and could be sticky for some time which could put pressure on emerging market currencies like rupee. We continue to be bearish on rupee with potential upside for USDINR till 82 levels.
What are the factors that one should consider while taking investment decision in crude, gold and industrial metals?
It is a petty large question to answer briefly, as we know most of the commodities are driven by macroeconomic fundamentals these are no different. Before making investment decisions in to these commodities an investor first should understand the purpose and need for doing so. Commodities investing is tactical in nature so most of it is short term trading.
In trading short term one should look at high frequency data for example like crude inventories, demand data from IEA, follow the OPEC on their decisions regarding production and output.
While trading in gold and silver one should understand that gold is a proxy currency and Indians by investing in gold they are converting the rupees into dollars and all the impact of either dollar depreciation or appreciation would be reflected in that investment. Gold performs better when the cost of money is cheaper and money supply is greater. With the current backdrop of monetary tightening gold may not be a preferred asset for some short term.
Industrial metals are driven by economic cycles of growth especially countries like China. Any data points which showcase economic growth are considered positive and any data points which indicate deterioration of economic health is considered negative for metals.
Though these are broad guidelines there are many other moving parts in the global economics. So going through a proper financial advisor who can provide these data points along with quality research could be essential for any retail investors who would like to access commodity markets. These markets are not complicated but data access could be tricky one and with quality data one can make better decisions and improve the performance of these investments.Disclaimer: The views and investment tips expressed by investment 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.