Head of Commodity Strategy
Summary: While probably only temporary the crude oil pendulum swung dramatically back in favor of higher prices this week. On that basis we suspect that WTI crude oil's range around $55/b seen these past three months now has shifted higher towards $60/b. Next up EIA's weekly stock report and FOMC meeting.
While probably only temporary the crude oil pendulum swung dramatically back in favor of higher prices this week when attacks on the world’s biggest oil processing plant in Khurais and Abqaiq in Saudi Arabia temporarily knocking out 5% of world supply. For a couple of days, the uncertainty resulted in major price swings before Saudi officials calmed the markets after saying that supplies would be restored sooner than the market had feared.
Following a week where oil market reports warned about the risk of emerging supply gluts due to weak demand growth the spike was painful but could have been a lot worse considering the amount of oil being impacted.
Rising oil prices into an economic slowdown leading to lower demand growth is not a good combination. This is probably the main reason why the crude oil rally deflated so quickly. The risk to supply from a geo-political escalation and Saudi Arabia’s apparent weakness when it comes to protecting its assets should keep the prices supported during the coming weeks. The risk of a supply shortfall has been ruled out with Saudi Arabia tapping into its domestic stockpile stocks of 180 million (Source: JODI) to meet any production short fall.
However, the geo-political risk premium, judged to be anything above $60/b is likely to take longer to disappear. Iran which has been accused of being behind the attacks increasingly find itself trapped in a corner with rising sanctions pressure making it increasingly impossible to sell its oil.
On that basis we suspect that WTI crude oil's range around $55/b seen these past three months now has shifted higher towards $60/b. A negative surprise from the FOMC later today could hurt equities help send oil lower while doubts about Saudi Arabia’s ability to meet its timeline for repair or an escalation may send it higher.
First up however its back to the US Energy Information Administration which will release its weekly stock report at 1430 GMT (attached)
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
