Commodities & Energy Sector
Despite higher uncertainty, our Brent price forecasts remain unchanged at just over $101/bbl for 4Q23 and $118/bbl for next year. We remain long equity exposure to oil and gas producers via the XOP ETF, and commodity exposure via the COMT ETF. We also remain long $100 Dec24 Brent calls and long 1Q24 Brent futures vs. short 1Q25 Brent futures in anticipation of stronger backwardation.
The Hamas attack against Israel, timed almost 50 years to the day after a similar surprise attack on Yom Kippur of 1973, has evoked parallels with the 1970s. Parallels not only with Middle Eastern geopolitics then and now, but also with inflation, economics, and financial markets. In this report, we explain what went wrong in the 1970s and whether the mistakes will be repeated. Plus: the sharp sell-offs in some Latin American currencies are reaching a potential turning-point.
Investors underestimate the likelihood of the war in Israel spilling outside of Gaza, and engulfing wider swaths of the Middle East, endangering energy supplies. Stay overweight Energy and Aerospace & Defense.
The Israeli-Arab crisis is more likely to expand and cause oil disruptions than market consensus holds. Close long dollar trades and go long energy and defense stocks relative to cyclicals.
As global financial institutions like the IMF draw attention to the real-estate crisis in China, the CCP will be forced to step up regulatory and restructuring efforts to contain its spread and limit further contagion domestically and globally. The Party also will be forced to deliver stronger fiscal- and monetary-policy support to beleaguered banks and developers. We expect it to do so, which keeps us bullish energy and metals. Failure raises the odds of a collapse in the property markets, which would be socially destabilizing, and lead to greater risk aversion and volatility globally.
Hamas’s attack on Israel raises the odds of a wider conflict in the Gulf, which would lead to higher oil prices. Given the response of oil prices Monday, markets appear to be relatively restrained in their assessment of a sharp escalation in prices. However, this is early days in a strategy that is just revealing itself.
Volatility will remain the key dynamic in oil markets in the aftermath of the surprise Hamas attacks against Israel on October 7. The risk of a major oil supply shock has gone up, but meanwhile supply constraints will remain at variance with global growth problems stemming from restrictive monetary policy over the next 12 months. Favor bonds over stocks, large caps over small caps, defense and energy stocks over other cyclicals, and US equities relative to global equities.
The market has been held hostage by surging rates. Zombie companies are “alive” and are multiplying – they are highly sensitive to surging borrowing costs. Underweight Utilities to reduce portfolio duration. Maintain neutral positioning of Basic Materials but take a granular approach to allocations within the sector.