Commodities & Energy Sector
Expectations for oil demand growth through 2023-24 are way too optimistic. Until these expectations fall to -0.5-1 percent, the oil price has further downside. Plus: collapsed complexity confirms that AI is in a mania, while basic materials stocks and ZAR/EUR are rebound candidates.
We expect the CCP to pivot toward more fiscal stimulus – and less credit stimulus – this year, which will put a bid under energy and metals prices. On the back of this view, at tonight’s close we are getting long 4Q23 Brent futures vs short 4Q24 futures, and re-establishing our XME and PICK ETF positions expecting higher prices and steeper backwardations in metals markets. We also are getting long 4Q23 COMEX copper vs short 4Q24 futures.
In Section I, we review the three possible economic scenarios over the coming year, and underscore that the “soft landing” scenario remains improbable. A “no landing” scenario could occur, but it would ultimately lead back to the recessionary path and thus is not a basis for investors to maintain pro-risk portfolio positions. US stock prices continue to be buoyed by rate cut expectations, but nonrecessionary cuts still appear to be a long way off. In Section II, we present our best estimate of the inflationary threshold that results in a positive or negative stock price / bond yield (SBY) correlation, and whether investors are likely to approach this level over the coming one-to-two years. US core inflation does not likely need to return to the Fed’s target in order for the SBY correlation to return to positive territory, but a move back to a positive correlation will very likely occur in the context of falling equity prices.
China’s recovery is losing steam. Its industrial segments will disappoint, while the pace of consumer spending will be moderate. Overall, the Chinese economic recovery will underwhelm in the months ahead. Odds are that interest rate expectations in China will drop even lower, which will weigh on the RMB.
EM oil demand remains resilient and will continue to be propelled by global growth this year. Supply management by OPEC 2.0 and production discipline outside the coalition will be maintained, forcing inventories lower. Recent price weakness – largely reflecting political uncertainty – has pulled our 2023 Brent forecast down to $90/bbl (from $95/bbl); our 2024 forecast remains at $115/bbl.
