The sanction from the U.S. and EU move would signify a new escalation in the west’s efforts to punish Russia. Global oil prices have spiked 65% since the start of 2022, along with other commodities, raising concerns about world economic growth and inflationary concerns.
By Navneet Damani
Rupee came under pressure and extended its weakness as global crude oil prices continued their upward trajectory and as geopolitical uncertainty keeps most participants on the edge. On the domestic front, rupee has been impacted by a surge in global crude oil prices and the move in crude oil is influenced by limited progress on Iran deal with the US and sanction on Russian oil supply. During the weekend, the Russian President said that Western sanctions on Russia were akin to a declaration of war and warned that any attempt to impose a no-fly zone in Ukraine would lead to catastrophic consequences for the world. Unless and until uncertainty between the two nations doesn’t settle down and the rally in global crude oil continues, weakness in the rupee could get extended. We expect the USDINR(Spot) to trade with a positive bias and quote in the range of 75.20 and 77.50 in the very short term.
Gold has rallied by almost 9%; whereas silver has rallied by more than 13%; on YTD basis. Geo-political uncertainties have always increased the safe haven appeal for both the metals. Tussle between Russia and Ukraine is the primary story for the market now which; if not eased, could continue to give further direction. Actions taken by other countries like the U.S., EU, UK, China and others are also giving jerk to metals. On other hand, Inflation was already a concern in the market, and now with soaring crude and metal prices it has added further pressure justifying, Gold an inflation hedge dialogue.
Major Central banks have already changed their stance to hawkish, and further actions and comments from the U.S. Fed Chairman in this month will be important for further direction in precious metal. Silver apart from being a precious metal is also an industrial metal. Even if uncertainties ease off, industrial demand and rally in overall metals could support the silver price ahead.
We continue to maintain our bullish stance on both the metals. After last year’s lackluster performance, we believe silver could outperform gold. Hence dips could be used as a buying opportunity for both the metals. On the domestic front, we could see the gold price targeting the levels of 54,000- 55,000 and for silver prices are headed to 72,250 and 80,000 over the period of next 12-months.
The price of Brent oil soared to almost $140 a barrel, its highest price since 2008, in early trading, after reports that western countries were discussing a possible embargo on crude supplies from Russia, the world’s second-biggest exporter, while delays in the potential return of Iranian crude to global markets fuelled tight supply fears. The sanction from the U.S. and EU move would signify a new escalation in the west’s efforts to punish Russia. Global oil prices have spiked 65% since the start of 2022, along with other commodities, raising concerns about world economic growth and inflationary concerns.
The US and other countries are also negotiating a nuclear pact with Iran that could lift sanctions on Iranian crude oil exports, although slower than expected talks regarding same is providing support to oil prices. The US and other IEA member countries last week announced that they would release more than 60mn barrels of oil stored in emergency stockpiles in a bid to prevent oil supply shortages and cool prices. A cautious approach is advised here on, although prices could inch higher with every unfortunate turn of events.
In the industrial metals space nickel has been an outperformer with over 78% YTD gains. Nickel has seen sudden spurt in today’s market with opening 15% higher and eventually rallying towards 30% gains in intraday. The underlying tone has been bullish, with massive demand coming from Steel Mfg. and EV battery makers. Inventories in both LME and Shanghai warehouse are quite shallow supporting prices.
Russia produces ~7% of world nickel and recent geopolitical concerns have added to supply side worries for Russian material. Todays 30% move was quite a surprise, triggered by arbitrage spread between LME and Shanghai exchange which was followed by very aggressive short covering. We have been bullish on nickel since $15,000 levels targeting $22,000 and $27,000, but such sharp intraday moves are detrimental for short term traders and could lead to huge losses. We also advise retail participants to stay away from metals specifically, nickel, aluminium and Zinc in the short run.
(Navneet Damani is the Sr. Vice President – Commodity & Currency Research at Motilal Oswal Financial Services. Views expressed are the author’s own. Please consult your financial advisor before investing.)