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The risk markets will be surprised by another 1mm b/d increase in crude oil supplies this year or next from the US is low, given the depletion of the unfinished-well inventory that drove shale output higher. Demand remains strong, although growth will slow. Higher non-OPEC 2.0 production, slowing demand growth, lower upside risk and the carryforward of elevated 2023 inventories take our 2024-25 Brent forecasts to $95/bbl and $105/bbl, respectively.
In light of the hotter-than-expected US CPI report, we look at what interest rate currency investors should focus on. Our conclusion largely keeps our existing trades in place, as published in our outlook, a few weeks ago.
We update our inflation forecast following this morning’s CPI report.
Increasing gray-zone confrontations and another round of tariff and non-tariff barriers to trade are not being reflected in commodity prices. This is keeping inflationary pressures emanating from the real economy subdued. That said, inflation risks are increasing as threats to commodity supplies and supply chains grow. Standard monetary policy focused on aggregate-demand management is ill-suited for addressing these risks, and could exacerbate supply-side tightness. We remain long oil- and metals-producer equities exposure via the XOP and XME ETFs, and to commodities outright via the COMT ETF.
The attacks on Red Sea commercial tankers by Iran’s Yemeni proxies, the Houthi movement, are an inflation risk inasmuch as they lengthen voyage times for any shipping forced to avoid the Bab el-Mandeb Strait. The risk of an expansion of these attacks is, in our view, limited, given Iran’s inability to project naval power in the region.
A post-mortem of our trades for the year, and also comments on future yen and sterling moves from the recent BoJ meeting, and the UK inflation report.
