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.