Weakening dollar not pushing crude prices up: Mecklai Fin

Jamal Mecklai, CEO, Mecklai Financials & Commercial Services said that the volatility of crude oil when denominated in dollars and when denominated in euro were close to each other and this suggests that the price of crude is not that highly dependent on the strength or weakness of the dollar.

Maklai informed CNBC-TV18 that from the wide range of commodities he conducted a research on, crude had the lowest correlation with the dollar. He also said that his year-end range for the rupee is around 41.75 to 43.25 to a dollar.

Q: What is the key finding? What would be the most interesting thing for instance crude. How do you project the co-relation going ahead?

A: The reason we undertook this study was because of something I had noticed over the last 2-3 years. The volatility of crude oil when denominated in dollars and when denominated in euro were close to each other.

It is bit tactical but that would suggest that the price of crude is not that highly dependent on the strength or weakness of the dollar. If you were to look at the volatility of gold denominated in dollars and denominated in euro there was a big gap. So in other words what that meant was, gold and the euro kind of moved in tandem with the dollar, whereas oil did not.

I had noticed this for about 2-3 years and I was little bit curious because everybody would say part of the reason oil is so high because the dollar is so weak. When we conducted an analysis we found that my intuition was correct. From the wide range of commodities we looked at, crude had the lowest correlation with the dollar.

Q: Where do you see crude and rupee headed those are the two things I guess the market is most worried about?

A: I will first just touch on the L&T story. One of the reasons the full year results were not so good, could be due to the commodity losses they faced. So in a way L&T is one of the most active players in commodity hedging.

Coming back to the story the basic point that we found or the key point is that oil is not strongly correlated with the dollar, so when the dollars strengthens oil is likely to fall less than other commodities and currencies.

We expect the dollar to strengthen globally, may be not too much but we could see it going little under USD140 on the euro by the end of the year and that should take a little heat out of the oil market.

Our forecast for oil at the end of this year was USD 99/bbl but that hit a range of about USD 90-112/bbl. I don’t think oil is going to fall below USD 100/bbl for sometime to come. Our research suggest that the dollar will weaken again and after a little blip up it will come back down to more or less these levels and oil will be back at USD 120/bbl a couple of years from now.

Q: And speaking of the rupee what does the research throw up?

A: The rupee surprised us a little. We were looking for this level of about 42.50-42.80 by the end of the year it came immediately. So it could potentially weaken a little bit more. Our range for rupee for the year-end is 41.75 to 43.25 to a dollar. But it is not going to weaken much more than this as it is apparent that the RBI cannot afford to allow the rupee to weaken anymore because of the inflation problem, which I believe is the number one problem country is facing today.