The bounce in oil prices has encouraged more investment in US shale fields, helping output reach new cycle highs and counterweigh OPEC cuts.
Negative correlation to the weakening dollar and safe-haven characteristics are positives for gold, helping justify its diversification role with portfolios.
"Output from Venezuela is down 30%"
Brent prices are up 60% from June 2017 lows. Supply disruptions in Nigeria and geopolitical worries about Iran have driven crude back to $70.
The International Energy Agency (IEA) expects world demand to grow 1.5 million barrels per day (mb/d) in 2018 to 99.3 mb/d, mainly thanks to China and India. OPEC supply is likely to rise thanks to increased pumping of natural gas liquids, which are not covered by output cuts. However, this might be mitigated if production in Venezuela, already down almost 30% since 2016, falls further.
The bounce in oil prices has encouraged US shale producers to step up production, with a focus on the most productive fields. Also, firms have invested massively in innovation, and the oil rig count reached March 2015 levels at 804. The IEA now expects US oil output in 2018 to reach its highest annual average on record at 10.7 mb/d and believes the USA could overtake Russia as the largest producer next year. US exports in late February were close to record highs thanks to strong global growth.
The Energy Information Administration (EIA) believes that this year world inventories will grow at the fastest rate since 2013, after shrinking in 2017. OECD stocks increased in January for the first time in 6 months.
All in all, despite a stronger global economy, oil prices should be driven south by 1/ greater US shale output and exports, and 2/ rising world inventories.
"Gold will benefit somewhat from trade tensions"
Market turmoil in February and March saw gold prices modestly higher despite unexpected outflows from exchange-traded funds (ETFs).
Despite the widely-expected hike from the US Federal Reserve in March, the first this year, the dollar lost further ground, driving gold prices towards the higher end of their $1,300-1,360 range.
Geopolitical instability and fears of a full-fledged trade war with China should support safe-haven buying of gold, although gains may be more modest than during last summer’s North Korea crisis.
Demand for physical gold should remain strong in 2018, especially in India, according to the latest GFMS survey. In China, gold investment peaked in 2013, although momentum buyers could return this year given recent price gains.
However, there are headwinds. 1/ Further rate hikes in the US – or indeed by other central banks which are following suit – will reduce the attraction of non-yielding assets such as gold. 2/ We expect higher bond yields and higher real rates, to which gold is negatively correlated. 3/ While we expect a steady rise inflation, gold is actually a weak inflation hedge, contrary to common belief.
Despite these headwinds, we continue to view gold as a good diversifier within portfolios, its safe-haven behaviour helping mitigate drawdowns and reduce volatility.
Sources: SGPB, Datastream, Q1 2018. 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.