Commodities & Energy Sector
China’s appetite for liquefied natural gas (LNG) is set to rise this year, spurred on by collapsing international LNG prices and a moderate recovery in domestic demand. Global LNG prices will face upward pressure on recovering worldwide demand and a limited supply increase in the second half of the year. We expect LNG prices in China and globally to be 20-30% higher than current levels by the end of this year.
Eventually South Africa will do its macro rebalancing the least painful way: via adjustments in nominal variables such as prices and currency, rather than in real variables such as jobs and incomes. That entails a much weaker rand in future.
Tight monetary policy will suppress copper capex. Loose fiscal policy, which is lavishing stimulus on energy and defense firms, will stoke copper demand. Constrained copper supply and turbo-charged demand will feed into headline inflation. If the CCP adopts large-scale monetary stimulus to break its liquidity trap, inflation pressures will rise. This global policy mix will bolster oil and gas demand well beyond the 2050 target for net-zero emissions, given the long lead times to bring new copper supply online. We remain long the XOP and XME ETFs, and the COMT ETF to retain exposure to tightening supplies and rising demand for copper and oil.
Bullish equity sentiment may persist in the second quarter on the Fed’s pause, but tight monetary policy, financial instability, elevated recession odds, extreme US polarization and policy uncertainty, and still-high geopolitical risk should encourage investors to maintain a defensive position for the coming 12 months.
The OPEC 2.0 supply cuts announced over the weekend will be fundamentally bullish international crude oil prices. According to our model, brent will cross the USD 100/bbl mark by August this year. We believe the cohort is pre-emptively cutting oil supply in response to threats to their economic interest, including risks arising from the higher possibility of recession and rising market volatility following the banking crisis.
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.