Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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Crude stays range-bound despite latest tariff-truce bounce
Ole Hansen
Head of Commodity Strategy
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Key points:
Crude oil’s four-day bounce shows signs of maturing after WTI and Brent both approached key resistance
The latest rally was triggered by a 90-day truce in the US–China trade war, reducing the risk to global demand
Further upside, especially through key resistance at USD 65 in WTI and near USD 69 in Brent, seems limited for now
Soybean oil and sugar correlate to fossil fuel prices through an increased focus on biofuels
Crude oil’s four-day bounce shows signs of maturing after WTI and Brent both approached key resistance, and levels that traders at this point are unwilling to trade through, given an underlying supply–demand imbalance which has been weighing on prices in recent months. This has been driven by a combination of trade war-related demand fears, and not least a rapid unwinding of the 2.2 million b/d in OPEC+ production cuts implemented between 2022 and August 2023—a strategy that has now been abandoned amid demand fears making it difficult to support the price, and widespread quota violations. Recent compliance data suggest cumulative overproduction of around 800,000 b/d, with Iraq, Kazakhstan, and the UAE cited as the main culprits. The latest rally was triggered by a 90-day truce in the US–China trade war, reducing the risk of a full-blown US recession later this year, while also slowing an economic slide in China—both leading to a more stable outlook for demand in the world’s two biggest consumers of fossil fuels. However, unless the US administration manages to successfully tighten sanctions against Iran—and potentially also Russia, if the first direct talks between Russia and Ukraine this week in Ankara fail to deliver a diplomatic breakthrough—the prospect for higher prices at this stage seems limited. With that in mind, the potential for further upside, especially through key resistance at USD 65 in WTI and near USD 69 in Brent, seems limited, with both instead mean-reverting back to the centre of their respective ten-dollar ranges.
Fuel prices and their impact on food commodities
In the US and globally, demand for biodiesel and sugar-based ethanol continues to grow, inadvertently giving these food commodities an additional layer of demand. Soybean oil is a major feedstock for renewable diesel, especially in the US, and as a result, the CBOT-traded soybean oil benchmark contract is up 24% this year amid a relatively tight global market for vegetable oils, which includes sunflower oil (Ukraine), palm oil (Malaysia and Indonesia), and rapeseed oil (Canada, the EU, and China). With strong demand for soybean oil, processors have been incentivised to crush more soybeans, which inadvertently has led to an oversupply of soymeal, driving down prices amid lower demand for animal feed and sluggish demand from China.
Meanwhile, earlier this week the US Department of Agriculture reported that domestic supplies of soybeans for the 2025–26 marketing year will be even tighter than analysts expected. That could mean fewer supplies of beans to crush into oil, further underpinning prices at a time when Republican lawmakers are working on extending a clean fuel production tax credit by four years from 2027.
Sugar is another commodity which in recent years have shown increased correlation with direction of traditional fossil fuels, especially gasoline. This week, as the mentioned crude oil rally unfolded, the raw sugar futures contract surged 3.3% in New York, the most in a month, on speculation higher fuel costs would prompt millers in top exporters India and Brazil to produce more bioethanol instead of the sweetener. While the US is the world's top producer of ethanol, but based mainly on corn, Brazil is the biggest producer from sugarcane with legislation mandating a minimum ethanol content in gasoline of 27%, with the potential for it to rise to 35%.
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