Oil should find strong floor at $85, rupee may skid to 85 to a dollar: Motilal Oswal commodities chief

The current slide in oil prices may take the price towards $85 but it should find a strong floor at those levels, according to an interview to Moneycontrol.

"Chinese Covid-related lockdowns have cooled off the premiums for now, but it doesn't eliminate the 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 said.

Narne with experience of 20 years in the field of Commodities and Foreign Exchange believes that inflation could be sticky for some time which could put pressure on the rupee.

They continue to be bearish on rupee with a potential upside forUSDINR at the end of the day.

Even after the recent correction, crude remained at around $92 a barrel. Is there a chance of it stabilizing around $60 to 70 a barrel in the next few months?

I don't know if crude will reach $60 levels in the first place. At the moment, the market is dictated by the basics. The first concern of the supply side is whether the sanctions on Russia and Ukraine will affect the supply of oil in the world. The risks to supply were the main focus of the backdrop.

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The focus of the price correction was on the demand side. There are concerns related to a global economic downturn or the likelihood of a recession. According to a recent data from the American Automobile Association, most Americans are cutting back on their driving and the major oil companies have reduced their demand outlook for the next five years.

This, along with Chinese Covid-related lockdowns, has cooled off the premiums for now, but it doesn't eliminate the political risk, which can cause prices to go back up quickly as the global spare capacity is too low. The current slide may take the price to $85, but we think it will find a strong floor at those levels.

Do you think the gold prices will stay rangebound or give a double-digit return?

Gold is not a typical commodity or financial instrument, but it acts like a currency and is influenced by the US dollar. Gold peaked out as the Fed began its monetary tightening cycle. The delay was caused by the Covid forcing the Federal Reserve and other central banks to push liquid assets into the market.

As we passed that phase and the central banks across the globe became more wary of Inflation, Gold in Dollar terms corrected again, this time close to 15 percent from the top.

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Increased import duty by 5 percent and a depreciation of the rupee have kept the domestic prices of gold flat over the last one year. The inflation in advanced economies like US would not be 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.

The domestic gold prices are under pressure. As the rates peak out, the tide may turn towards the mid-2023's.

Do you think there will be a significant rally in metals once the recession fear is over?

Economic booms and bust cycles are very large and last a long time.

The economic impact of the recent lockdowns in China was less than expected because they were imposed in a more orderly way. The easing of global supply chains is one of the main issues.

Many economists are still debating whether the global economy will be pushed into a recession or not.

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The tightening of monetary policy will have a negative impact on commodity prices in the coming months. The metal prices are likely to go up for a short period of time due to some recovery in demand.

The impact of higher rates on the global economy will keep any rallies capped.

What advice do you give to retail investors who are interested in investing in commodities but don't like trading in them?

Commodities don't create wealth. Tactical opportunities are where they are trading instruments. They are less correlated with the equity market and any portfolio with some weightage of commodities can perform better.

Retail investors want to maximize their returns with the capital they use. Large trends emerge in the commodities space. The recent examples could be the run up in cotton, which impacted large listed corporates and led to sharp movement in their stock price. Participants who can play both the markets have a better chance of making money.

Commodities have fewer instruments to track and trade, which is a benefit for traders. It is possible that options in commodities could be an advantage for participants who are trading options in equities. Direct participation physical commodities and exchange traded funds can be used by long term investors.

The rupee started trading above 80 against the US dollar after the renewed interest of the foreign institutional investors. Do you think the current depreciation of the rupee is a good sign for the economy?

The role of foreign investors in the Indian rupee is limited. The rupee's trend is related to crude oil prices. With the recent rise in crude prices we have seen rupee depreciate to 80 levels and the stability and slight appreciation after that was caused by the correction in crude price.

Though crude prices have corrected from their top, we believe there are significant upside risks, with supply side so tight any disruptions could cause a serious price rise andtrigger depreciation in emerging market currencies.

On the other hand, we believe inflation to be more structural in nature and could be a problem for the rupee in the future. We continue to be bearish on rupee with the potential for it to go up in value.

What are the factors that should be taken into account when making investment decisions in crude, gold and industrial metals?

It is a small question and we know most of the commodities are driven by macroeconomics. Before investing in these commodities, an investor needs to understand the purpose and need for doing so. Most of the investing in commodities is short term.

When trading short term, one should look at high Frequency data such as crude inventories, demand data from IEA, and the decisions of theOPEC on their production and output.

While trading in gold and silver one should know that gold is a proxy currency for Indians and they convert the rupee into dollars when investing in gold. The cost of money and money supply affect gold's performance. Gold may not be a good investment for some time.

Economic cycles of growth are what drives industrial metals. Any data points which show growth in the economy are considered positive and any data points which show decline in the economy are considered negative.

There are many other moving parts in the global economy. For retail investors who want to access commodity markets, a proper financial advisor who can provide these data points along with quality research is essential. One can make better decisions and improve the performance of their investments if they have good data.