Following the fall in commodity prices amid financial sector volatility, China’s reopening and still-strong US activity may provide a supportive backdrop for prices over the coming months. However, the start of a US recession will ultimately more than offset the China boost.
- Commodity prices have whipsawed year to date over optimism around China’s reopening recovery, concerns over US monetary tightening and most recently turbulence in bank stocks.
- The consequences of China reopening for commodity markets are not as clear as the initial market reaction signalled.
- The service-led composition of growth favours oil prices over metals in the coming months.
- Pent-up demand for travel will likely boost demand for transport fuel from Q2 onwards. However, the upside will be limited as China built up fuel inventories during lockdowns.
- A rotation away from manufacturing demand for naphtha and LPG toward transport fuels will also limit the overall boost to energy demand.
- We do not expect the positive impact of domestic and international travel on oil prices to be sustained, as our outlook for a US recession will eventually outweigh the boost from China.
- The net effect of divergent growth is likely to be lower prices. Following an initial undershoot, we are conditioning our global inflation forecasts on Brent settling around $70 pb by mid-2024.
- Overall, the decline in energy prices will prove disinflationary, due to base effects following the fuel price surge triggered through the pandemic and war alongside our expected oil price path.