We expect oil prices to remain in a $65-70/b range. Global demand should improve, but upside in prices should be capped by structural oversupply. Gold’s traditional role as a hedge against economic shocks, inflationary pressures or policy uncertainty remains an attractive quality. We expect prices to consolidate, offering better conditions later this year.
Gold: Losing fundamental support
Since end 2018, gold has lost a number of supports – global growth should improve, policy tail risks (e.g., Brexit or the trade war) should ease, inflation is muted, and the dollar has rallied. On the other hand, the Fed’s halt to rate rises lowers the opportunity cost of holding non-yielding assets like gold.
While it is difficult to value gold and gauge expected returns, it tends to come into its own in times of serious concerns about growth and/or tail risks. While we expect prices to hover between $1250 and 1300/oz this year, we hold it to hedge against risks elsewhere in portfolios. It has low correlation to equities, making it a valuable portfolio diversification tool.
Brent: Capped by structural excess supply
The recent dynamics for oil prices have turned positive – OPEC+ has over-delivered on output cuts; tail risks for global growth have faded, helping oil demand to stabilise; and US output is showing signs of moderating with bottlenecks in pipelines and refining capacity.
Since the shale revolution led by the US, OPEC is no longer the dominant force in the oil market. In order to regain lost clout, OPEC has built alliances with non-members such as Russia to attempt to preserve the cartel’s power. This means better compliance with output cuts will be demanded to rebuild credibility. We expect OPEC+ to stick with its planned cuts and to renew them at their next meetings to ensure price stability.
After the plunge in oil prices at end-2018, US producers are now indicating slightly lower output growth. They have scaled back investment plans and halted rig start-ups and completions. Bottlenecks in US oil infrastructure will also limit the amounts that US producers can bring to market. As long as Brent remains below $70/barrel, US output could disappoint.
Despite worries about global growth, fading tail risks, Chinese stimulus measures and a trade agreement should help foster oil demand. World GDP estimates for 2019 are consistent with +1.5% growth in demand.
Geopolitics have mixed implications. If the situation in Venezuela continues to deteriorate, OPEC would probably act to avoid disruption to global supply. However, prolonged uncertainty driven by a disorderly political transition would justify higher prices. Given the situation in Venezuela, the US could decide to extend the waivers granted to several countries on their Iran crude imports to avoid further market disruption. And Libya remains highly unstable, with three leading factions competing for control of the main oil basins, with about 0.7mbd of crude exports at stake.
While fundamentals have partially improved, market technicals have deteriorated suggesting the year-to-date rally is tiring. We expect prices to range between $65-70/b this year, capped by structural oversupply.
Past performance should not be seen as an indication of future performance. Investments may be subject to market fluctuations, and the price and value of investments and the income derived from them can go down as well as up. Your capital may be at risk and you may not get back the amount you invest.