Oil

High rates have hurt real estate and, now, banks. The next shoes to drop: Loan growth, profits, and employment. Stay defensive. Recession is probable, but risk assets have not priced it in.

Stay defensive in the second quarter. We can see a narrow window for risky assets to outperform but we recommend investors stay wary amid high rates, supply risks, extreme uncertainty, peak polarization, and structurally rising geopolitical risk.

In this Strategy Outlook, we present the major investment themes and views we see playing out for the rest of 2023 and beyond.

CCP officials are discussing policy options for breaking out of a deepening liquidity trap. Anything policymakers come up with will be additive to existing spending and to the multi-trillion-dollar fiscal-stimulus packages being rolled out by the EU and US. Inflationary pressures in the real economy will become embedded as increasing demand for industrial commodities meets constrained supply. Stagflation likely follows.

China’s victory in getting KSA and Iran to restore diplomatic relations is of far greater consequence to commodity markets than the past weeks’ bank failures in the US. For China, further success in sorting long-standing security issues in the Middle East could incentivize oil and gas capex and affect oil flows. With short- to medium-term fundamentals largely unchanged, we are keeping our 2023 and 2024 Brent forecasts similar to last month, at $95/bbl and $110/bbl, respectively.

Bank failures are another ‘canary in the coal mine’ warning that a US recession is imminent, yet stocks, bonds, and the oil price are still a long way from fully pricing it.

China’s housing market adjustment will be protracted, causing several years of sub-par growth in the world’s second largest economy. We go through the major investment implications.

The rebound in growth is pushing up inflation. More aggressive monetary policy is likely to trigger recession over the next 12 months or so. Investors should stay defensive.

Investors should avoid / stay underweight Turkish stocks and local currency bonds versus their respective EM benchmarks. Stay underweight Turkish sovereign credit.

High realized inventories are weighing on global oil prices. We expect oil market deficits will draw on accumulated inventories over the forecast period. Petro-state instability – arising mainly from Russia and the Middle East – is a key geopolitical trend in 2023 and will likely lead to oil supply shocks. We are revising our Brent price forecasts to $97/bbl this year and $111/bbl in 2024. Investors should brace for upward price pressure – as long as recession risks remain contained – and persistent high volatility.