Energy

Pent-up demand for services is keeping the global economy going, but we still expect recession over the next 12 months. Investors should keep a cautious portfolio stance.

EUR/USD is trying to breach above 1.10. What is the balance of positive versus negative factors that would allow the euro to breakout?

Fertilizer prices will continue to move lower as the natgas price shock touched off by the Russian invasion of Ukraine dissipates. As a result, we expect grain prices to soften another 10% this year. Food-price inflation will move lower over the course of the year as grain prices weaken, provided a weather- or geopolitical shock does not once again send natgas prices higher.

Inflation is hot, but inflation expectations are not. We explain the answer to this apparent puzzle and discuss the investment implications. Plus we identify two commodities that are at imminent risk of reversal.

We Introduce our new macro models for the Eurozone’s equity earnings, which include sectoral forecasts. Find out what they predict for the next six-to-nine months.

The Gulf’s political economy – particularly that of KSA – drives the supply side of oil-price discovery. This has been evolving since 2017, when OPEC 2.0 was formed. It is now fundamental to the market. We expect Brent to average $95/bbl this year, unchanged from last month, and $115/bbl (up $5/bbl vs. last month). WTI will trade $4-$6/bbl below Brent over the forecast interval. We remain long the XOP and COMT ETFs.

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.

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.

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.

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.