Two major forces have combined to lower commodity prices due to the sharp increases seen last year, BofA Global Research said in a report sent to Rigzone this week.
“First, the Fed has raised interest rates at one of the fastest rates in decades in the past 15 months to contain the sharpest rise in inflation in four decades,” analysts at BofA Global Research said in the report.
“In turn, the rapid rate hikes have caused a sharp contraction in M2, triggered a banking crisis and helped reduce inflation,” they added.
“Second, faced with the twin evils of inflation and the first war in Europe since 1945, the U.S. Treasury designed a set of economic sanctions that have minimized global commodity supply losses while reducing tax revenue to the Russian government,” they continued.
With the exception of gold, beef and sugar, prices of major commodities are falling year-on-year due to ample supplies and a cloudy macro outlook, analysts said in the report.
“To combat downward pressure on prices, Saudi Arabia voluntarily cut a million barrels per day on Sunday and OPEC+ extended its production deal until 2024,” analysts noted.
Still, oil remains at the center of the struggle between monetary and physical forces in the commodity market, BofA Global Research representatives noted in the report.
“At its core, markets are witnessing a battle royale between Saudi Arabia and the US Federal Reserve, pitting Prince Abdulaziz bin Salman against Chairman Jay Powell,” they said.
“Faced with the need to preserve financial resources to transform its economy, Saudi Arabia pledged to cut oil production volumes four times last year to support oil prices, aggressively flexing its muscles as the world’s most powerful crude oil producer,” the analysts. added
“With macro headwinds moving from a tropical storm to a Category 1 hurricane, OPEC+ volumes are declining again and oil stocks should tighten as inventories fall in 2H23 “, they continued.
“However, as physical oil markets face monetary contraction, bearish asset allocators will continue to face bullish oil speculators,” the analysts warned.
Oil may struggle to rally
According to the report, oil prices may struggle to recover until the Fed eases money.
“Core commodity traders struggled to reconcile tighter balance sheets with falling oil prices, while multi-asset dealers instead followed the simple logic that tighter monetary policy will lead to weaker growth and falling inflation, shorting commodities along the way,” analysts at BofA Global Research. he said in the report.
“OPEC+ scored a partial victory with April’s oil-cut surprises, scaring CTAs out of their shorts. Still, monetary forces are extremely powerful and trend followers are just one sleeve of the broader financial sector “, they added.
“Most importantly, the market is pricing in Fed rate cuts starting in December, a development that should support oil prices through 2024,” they continued.
However, this rate trajectory likely reflects not a central case, but the average of two outcomes, analysts noted in the report.
“1/ sticky inflation with a robust labor market forcing the Fed to keep rates higher for longer or 2/ a severe recession forcing the Fed to cut rates at 100bp clips,” the analysts
“In this battle royale, oil is on the losing end until the money starts to fall again, and we maintain our average forecast of $80 a barrel for Brent by 2023,” BofA Global Research analysts added in the l report
here and now
In a separate report sent to Rigzone this week, analysts at Standard Chartered noted that currently the oil market appears to be almost exclusively focused on the here and now and more comfortable with lagging indicators, “such as short-term physical spreads “.
“If this is true, the lags between producer actions and market responses may be long and may not occur until a tightening of the physical market occurs,” Standard Chartered analysts said in the report.
“The market is currently trading as if it wants everything to happen at once and doesn’t like delays. If something doesn’t happen instantly, the implicit assumption seems to be that it doesn’t matter much,” they add.
“We have already seen, within 48 hours of the OPEC+ press conference, market feedback suggesting that the lollipop cut [Saudi Arabia’s one million barrel per day production reduction] it has failed and has not hardened the market. The reality is that the cut does not begin until July 1st, and given transit times, the reduction in availabilities resulting from the cut will not be felt at most refineries until late July or early August,” the analysts continued.
Analysts at Standard Chartered stressed in the report that being subject to a delay does not diminish the strength of a bid change. Analysts also forecast in the report that the price of Brent will average $91 per barrel this year. In the report, Brent is expected to average $88 per barrel in the third quarter of this year and $93 per barrel in the fourth quarter.
Brent Price
On June 8, 2022, the price of Brent closed at $123.58 per barrel. After this close, Brent fell steadily for the rest of the year, closing at $76.1 a barrel on December 9, 2022. The commodity’s highest close in 2023 so far was seen on January 23, at $88.19 a barrel, and its lowest close in 2023. , so far, seen on May 3, at $72.33 a barrel.
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