Commodity markets have lost three quarters of their gains from the peak this year as recession fears outweigh tight supply concerns. Mounting risks to global growth mean that demand expectations are likely to ease.
Therefore, we have a neutral stance on broad commodities. But we maintain our preference for oil and energy equities as supply-side challenges are likely to have a bigger impact in the coming months than slowing demand. We still see higher oil prices in the months ahead.
Commodity prices have slumped as recession fears overtake supply concerns.
Year-to-date gains for the Bloomberg Commodity Index have shrunk to 11% from as much as 42%, as recession fears overtake supply concerns.
Brent oil prices slid back to January lows on mounting concerns that aggressive rate hikes will hurt global energy demand.
But supply-side challenges in energy will likely outweigh any demand slowdown in coming months.
OPEC+ will cut output by 2mbpd from November. Though some are already producing below quota, Saudi Arabia estimated the actual cut could be around 1–1.1mbpd, which is still significant.
OECD strategic oil reserves sales are due to end in 4Q, and countries may start refilling tanks. Meanwhile, Europe will ban Russian oil imports by year-end.
In Europe, soaring gas and coal prices are spurring a switch to oil for power generation. Global oil demand is also holding up, and we see it rising 1.9mbpd.
So, we are still most preferred on oil and energy equities.
Although we reduced our oil forecast due to growth headwinds, we still see prices rising to USD /bbl for March, June and September 2023.
We are neutral on broad commodities. We believe investors should hold their existing exposure rather than add more broad exposure, and be more active and selective within the asset class.
Did you know?
The EU is set to cut imports of Russian waterborne crude by 5 December and refined products by 5 February.
Oil demand in the largest consumer, the US, hit the highest level since 2006 in June.
Demand in India, the third largest consumer, is currently growing the fastest among major economies.
Investment view
Oil prices are likely to remain supported by tight supply due to a cut in OPEC+ production, an end to OECD strategic reserves sales, a switch to oil to power electricity, and the EU’s ban on Russian oil imports by year-end. We maintain our preference for oil and energy stocks.
