Opinions

In a world fragmented by tariffs, loss of global trade treaties and a fiscal expansionary Europe & China combined with a weakening US consumer profile & fading US exceptionalism, we find it extraordinary difficult to predict commodity road maps for even short term. While we also initially thought the tariff tactics of Trump were transactional in nature, now we are moving to the camp where we think it is actually transformational in nature. The aim of tariffs is to permanently reduce US trade deficit & get back manufacturing to US. The problem is not just US tariffs. How individual nations respond to these tariffs is also unique in nature. And then one has to superimpose all these tariff decisions over one another to figure out the net impact on commodity prices. A tariffed world will lead to commodities finding itself priced higher in the host country & lower in other importing countries in the short term. But as higher prices lead to demand destruction in the host country in the medium term, the host country prices fall vigorously. In general, a fragmented world leads to higher shipping costs, loss in efficiency & a more volatile pricing environment across commodities. Based on our above assumptions, we remain most bullish on Silver, then neutral on base metals such as Copper & finally most bearish on Crude.

OPEC earlier aimed to restore a total of 2.2 million barrels a day in monthly increments, starting in April. But can they refrain from bringing this supply online the 4th time? We don’t think so. We believe the Achilles heel of OPEC is market share and not crude prices anymore. In case of a further delay, other prevalent conditions imply they lose both markets share as well as lower prices. In case of restoration, at least they stand to gain the market share even if they loose on price for the time being. Technically brent prices are headed to 60 if it breaks 70 levels on weekly closing basis & we believe it’s a matter of when and not if. US-Russia talks have moved rapidly, raising prospects for faster resolution of the Russia-Ukraine war, and loosening of oil/gas markets. A Russia-Ukraine resolution could lead to higher crude and product supply availability, as well as lower tonne-miles in waterborne tanker shipments which would be bearish for oil markets. President Trump has also remarked on cutting taxes “substantially” for oil/gas producers along with the push for 100% capex expensing. Till now Iran's Ayatollah Khamenei has sounded a tough nut to crack but the domestic economic and political pressure in Iran continues to rise, as its currency has weakened dramatically, youth unemployment is high, amid power shortages. How long can Iran resist the call for a deal under these circumstances. Even Iraq/KRG supply could come also back soon. Iraq’s oil minister said last week that oil exports from the semi-autonomous Kurdish region could resume within a week, which could add up to 0.1-m b/d of supply back to market. In summary, OPEC is facing loosing more market share if it delays further the roll back of output cuts. That's the Achilles Heel for OPEC. Solution lies in accepting that oil prices need to fall significantly lower for once to weed out the US shale and other new non OPEC producers. Hence we take a contrarion call and believe that OPEC will roll back the output cut as planned in it's early March meeting.

On 13th April’24 when we gave a buy recommendation on Gold when it was trading at 2345 levels, we didn’t know how soon we will be close to our profit target of 3000 levels. Could it be a starting point for a larger rally in Gold prices driven by geopolitical changes, US government’s desire to revalue gold reserves as well as Trump’s objective of a weaker dollar to incentivise manufacturing in US. Or it is the beginning of a consolidation period around 3000 odd levels. We look at recent factors driving Gold prices and then try to reach a conclusion on predicting near term price patterns. We believe that with Asian investment and central bank demand appearing resilient, the downside risks to gold are relatively modest, while further upside may be limited by the fact that Comex inventory will soon be levelling off. We think a period of consolidation ahead is most likely before prices move higher later in the year. In fact, some consolidation around 2800-3000 levels might be a healthy starting point for a larger rally to 4000 odd levels. But for the time being, we believe in taking chips off the table if we breach 3000 odd levels in a short squeeze or another Trump led event. We will further revaluate entry points when we get better comfort on margin of safety. We see more safety in Silver at current levels where had given a buy recommendation on 15th Nov’24. We remain invested in Silver for a target level of 40 levels.

Brent has been range bound for several now between 70-80 levels. But we had a medium-term target of it testing 50. Our basic hypothesis still remains the same. We have a large demand evaporating from China due to EVs adoption on a large scale by Chinese consumers, a large supply waiting on the sidelines from OPEC+ & now a US president whose fascination with “drill baby drill” is known worldwide. We also believe that we might see a Russia Ukraine ceasefire soon brokered by US and delivered in Saudi Arabia. Add to the above, a higher for longer rate environment in US implying higher funding costs for speculators, a slowing global economy due to tariff tensions & we have the perfect mix for Brent testing 50 by end CY25. More than half the passenger cars sold in China are now electric or hybrids, shrinking the need for gasoline, which accounts for about a quarter of Chinese demand. Hence Chinese crude oil imports fell 1.9% to 553 million tons in CY24, the third decline this decade & the 1st decline in data going back to 2004 if we exclude covid years of 2021 & 2022. China’s sales of electric vehicles and hybrids have reached a tipping point. They’ve accounted for more than half of retail passenger vehicle sales in the four months from July'24. Many brokerage houses now see Chinese gasoline consumption dropping by 4% to 5% a year through 2030. Moving on to OPEC+, we believe that they might increase output from Q2 in line with what Trump wants. OPEC+ can’t resist the pressure forever from Trump. Technically, going ahead with the Q2 hikes wouldn’t equal capitulation. In addition, it helps them in regaining their market share back from US shale. We also believe that Trump is likely to broker a ceasefire deal between Russia & Ukraine aided by Saudi Arabia’s MBS. That implies withdrawal of sanctions on Russian oil and more supply. Current on off tariff news adversely impacts the global economy & trade. We expect tariff issues to further reduce global oil demand leading to further pressure on brent prices lower. Recent US inventory data showed stockpiles had climbed for a second consecutive week. Crude inventories rose by 8.66 million barrels in the week ending 31 January, significantly surpassing the estimated increase of one million barrels. This followed a build of 3.5 million barrels in the previous week, suggesting weakening demand. In summary, we are entering a lower for longer crude price environment driven by a large missing buyer, a large supply waiting to hit physical crude markets, tariff woes, a slowing global economy & a US president whose stated policy is lower oil prices.

Across the precious metals complex, gold’s outperformance this year is matched only by silver, which is up 30.5% YTD (gold is up 27.6% YTD). Silver tends to outperform when both macro drivers, the USD and real yields are supporting investor appetite and industrial demand is booming. These two drivers may alternate over the next 12 months rather than co-existing, suggesting that elevated prices are here to stay. Also current Gold to Silver Ratio is about 82.39. Assuming that Gold Silver Ratio reverts back to average of the 21st century at 60:1, the price parity for Silver w.r.t. Gold would be in the range of $51 to $70. Demand supply wise, Silver market is widely tipped to experience a fourth straight year of structural market deficits in 2024. According to the Silver Institute’s estimates in the 2024 WSS, the global silver deficit will rise by 17 percent to 215.3 million troy ounces in 2024 due to an expected 2-percent growth in demand again led by robust industrial consumption combined with a 1-percent decline in total supply. The elevated demand for silver for various industrial use cases means that not only is demand easily outpacing supply but also that there are probably only between 12 and 24 months of silver available before inventories run out. Hence it is a matter of time before investors see the huge demand supply deficit & Silver prices might jump to $50. We recommend to invest in Silver at every dip till $ 28 levels and hold for minimum $40 levels by mid CY25.

In crude markets, there is a new fear that OPEC+ leaning toward reviving oil production as planned in October might lead to over supply over all ready weak demand conditions as seen in low global manufacturing PMIs, especially Chinese data. Even with global OECD crude inventories lower than 10yr average by 4%, brent prices keep on falling to the lower range of 75-85. Global slowdown in manufacturing PMIs specially China, impending OPEC+ increase in output by 188kbpd from Oct’24 as well as trader’s positioning (major gamma hedgers are concentrated around 70 levels on brent & 65 levels on WTI) gives us confidence that Brent is headed towards sub 70 levels by end CY24. This might get compounded if US recession fears increase or if Chinese data further weakens. We believe OPEC+ cartel is now aiming at strategically disciplining non-OPEC supply after having lost a significant market share to US shale during the last 2 years & hence might allow prices to fall so that low margin US shale fields with break evens around 60 levels might find production non viable at such levels & get weeded out.