FICC
| Commodities
Oil, metals, and the wider commodity complex, analyzed from the global macro picture down to physical supply and demand.
US crude oil output has not peaked. It will continue to increase. A continued expansion of US production, even if it is moderate, along with a possible increase in OPEC+ output, will lead to an oversupplied oil market. Moreover, we expect the demand headwind from the business cycle slowdown to weigh on crude prices. Over a 6-to-12-month horizon, the path of least resistance for oil prices is to the downside.
A bearish chill has engulfed oil markets. Earlier this week, Brent dropped to a near three-year low, falling below the trading range that had prevailed over the prior 18 months. In this Strategy Insight we detail why we do not believe that the worst has passed for oil markets. Rather, prices are likely to drop further over a six-to-nine-month horizon.
Central bank gold buying is likely to remain a tailwind for the yellow metal, supporting a continuation of the rally over the coming years. We maintain a long strategic position in COMEX gold and recommend an overweight to the yellow metal within commodity portfolios.
Oil prices failed to hold onto their recent rebound. They slid on Tuesday as demand con-cerns resurfaced. This dynamic is the latest iteration of a tug-of-war that has kept oil prices in a trading range since H2 2023. Bearish demand concerns are enforcing an upper limit on the price of crude while bullish supply risks are maintaining a floor.
Oil prices are caught in a tug-of-war. Concerns about the demand outlook are acting as a price ceiling while the risk of a geopolitically induced supply shock is providing a floor. Prices are likely to remain rangebound over the near term. Yet the path of least resistance over a 6-to-12-month horizon is to the downside.
The absence of a catalyst that will boost Chinese steel demand dims the odds that iron ore and steel prices will recover over the coming six-to-nine months. Instead, we expect ferrous metals to face further downside into year-end.
A global economic downturn will be a headwind for natgas prices over the cyclical horizon. Thereafter, LNG capacity additions will help keep the market in balance into the end of the decade. That said, Europe’s increased dependence on global LNG flows raises its exposure to market dynamics in the rest of the world. This will keep volatility elevated versus pre-Ukraine war.
Gold prices might experience a correction or consolidation over the near term. However, cyclical and structural forces will ultimately cause the yellow metal to trend upwards.
According to OPEC+’s revised production path, the group will begin unwinding some of its production curbs in Q4. This announcement suggests that the coalition might be shifting its strategy towards defending a price floor. Such a shift in OPEC+ strategy does not imply that the ‘OPEC put’ is completely dead. Rather, its strike price has been lowered.