FICC

The three major oil forecasters – IEA, EIA, and OPEC – are forecasting oil demand growth until 2025 to be broadly in line with its range over the past four decades. On a cyclical horizon, we give high odds that a recession will begin within the coming 6-12 months, disappointing these oil demand forecasts. On a strategic horizon, the IEA projects EVs will displace 9% of global oil demand by 2035, serving as a long-term demand headwind.

The sharp move higher in copper prices is missing a clear fundamental catalyst. Meanwhile, the cyclical outlook for the global economy in general, and manufacturing activity in particular, is unlikely to provide a tailwind. Given that aggregate copper inventories on global exchanges have been rising briskly, there are high odds that the copper price surge will soon reverse.

Special Report

Varying degrees of exposure to certain economic sectors and regions can help explain differences in performance across commodities. This report uncovers some of these differences. In doing so, it presents our framework for analyzing commodities from a business cycle perspective.

The no landing scenario has been gaining traction as the dominant driver of financial markets, providing a tailwind to commodities via increased demand for inflation hedges. Unless commodity markets experience a major supply shock, a narrative shift in favor of the hard landing scenario would create a headwind for commodities. A decisive top in the equity market would provide an early warning for commodity investors.

Special Report

Investors should not underrate the chance of an oil shock ahead of the US election as Israel needs to push back against Iranian proxies, and Iran needs to demonstrate its regional reach to put a wedge between Israel and the US. We remain strategically long energy commodities and equities, and defense stocks via the COMT, XOP and PPA ETFs, which will continue to outperform cyclicals.

Strong growth in the US and large EMs ex-China will translate into higher oil demand in 2024 – 2025. With mostly unchanged oil supply, tighter markets will ensue. We’ve raised our 2024 average Brent forecast to $98/bbl, and expect $105/bbl in 2H24. In 2025, we expect Brent to average $110/bbl. Prices could easily move higher, if the US moves against one or all of the states enjoying US sanctions forbearance – Russia, Iran, Venezuela. If Brent trades through $110/bbl, Saudi Arabia and the UAE will release spare capacity.

Our bullish gold, copper and oil calls have played out as expected, with gains of 14%, 11% and 16% since the beginning of the year. In this risk assessment of our views, we conclude the bull trends driving these markets higher remain intact. However, the risks of central-bank policy errors, resource nationalism and protectionism are rising. We are raising our gold and copper price targets to $2,500/oz (from $2,300/oz) and $5.00/lb (from $4.50/lb).

Copper markets are fast approaching a price breakout, as Chinese smelters scramble to find ore to meet increasing refined-copper demand in the wake of a global manufacturing rebound. We are holding fast to our expectation of $4.50/lb (COMEX) this year. We remain long the XME ETF to retain exposure to copper miners and refiners, and the COMT ETF to retain exposure to commodity flat price and the copper backwardation we expect.

Inflationary pressures this year will remain subdued as labor-productivity growth – driven by strong capex and R+D spending – continues. This will make the Fed more confident in beginning its policy-rate-cutting cycle in June, and will keep gold well bid. We are raising our gold target to $2,300/oz. We continue to expect no recession this year.

We expect oil-demand growth to increase this year – to 1.7mm b/d from 1.4mm b/d (0.30% of total demand) – and anticipate tighter supply at the margin. Our balances estimates are unchanged, leaving our Brent price forecasts for 2024 and ’25 at $95/bbl and $105/bbl. We expect the US to deploy warships if Venezuela makes a move on Guyanese territory in a bid to grab deep-water oil production.