‘Oil prices unlikely to touch $100 per barrel again’

Oil will hover in the range of $60-75 per barrel, says DSP Mutual Fund’s Gopal Agrawal

Gopal Agrawal, Senior Vice-President - Equity, DSP Mutual Fund, closely tracks commodities and international trade. In an interview with BusinessLine, he says that crude oil could hover in the range of $60-75 per barrel, and a return to triple digits seems unlikely even if Iranian supply is disrupted. Excerpts:

DSP Top 100, one of the funds you now manage, had been underperforming. What went wrong and how do you plan to improve the fund’s performance?

The fund was running quite underweight on pharma, had zero weight on IT and was overweight on the oil and gas sector. The combination hurt its performance.

We will try to change the portfolio as and when necessary, based on value-investing strategies and the earnings upgrade cycle. Completely staying away from any particular sector may not be a right strategy. In every sector, there are certain companies we can pick based on a bottom-up analysis. Finding value picks across sectors will reduce the portfolio’s volatility.

What is your outlook on oil? Is $100 per barrel possible again?

Oil is volatile because of geo-political reasons. Producers do not want prices below $60 per barrel. And supply will increase substantially when the price hits $70-75 per barrel.

So, oil will hover in the range of $60-75 per barrel. However, there is a risk — we need to have some Iranian oil in the marketplace. If Iranian supplies becomes zero, oil could spike.

But I doubt it (price) will again touch $100 a barrel.

Everybody profits above $85 per barrel. Even the oil from Canadian sands — which trades at a discount of $15-30 — can make decent profit at that level.

Hence, as the supply bumps up, prices going back to $100 per barrel is very difficult.

Gold currently quotes at about $1,250 an ounce. What is your view on its price?

The cost of production of gold from new mines is $1,150 per ounce. This should protect the downside for gold as cost of production is the ultimate bottom for any commodity.

The upsides on the metal will depend on the US fiscal deficit and the interest rate cycle in the US. If the Fed (US Federal Reserve) turns dovish, gold can move up.

In India, we have made returns on gold because of two reasons — rupee depreciation and the 10 per cent import duty. With rupee depreciating every year and due to global turmoil, gold can give positive returns in the next 2-3 years. That said, with the metal’s volatile prices, investors should buy on dips and accumulate gradually.

How will the ongoing trade dispute between the US and China play out?

The Chinese economy is feeling the heat. But so far, we haven’t seen the real trade war. The real trade war would have started on January 1, 2019 —the day the US was scheduled to sharply increase the tariffs on Chinese imports. This has been postponed to the end of March 2019, until when the current 10 per cent duty (on certain items) is applicable.

So, US companies are engaging in a lot of pre-buying as Chinese imports are cheaper despite the 10 per cent duty. So, we see China’s exports to the US rising. The real heat of the trade war will be felt if and when the 25 per cent duty kicks in.

What are the risks for dollar?

With the tax cut in the US last year, the country’s fiscal deficit is raising. Its current account deficit has widened. If the imposition of tariffs continue, global central banks may reduce their treasury purchase, which can exert pressure on US interest rate and the dollar.

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