After a 15% decline this year, oil prices should return into a $50-55 range in H2 despite the slow rebalancing of supply and demand.
Gold to offer limited upside in coming months, as political risks are receding and demand will only recover slowly. We still target $1,225 in 6 months but raise our objective to $1,250 in one year.
"We still see oil prices returning into a $50-55 range this year."
Oil prices are down over 15% this year as supply continued to outstrip demand in Q2: 1. Investors were hoping for further cuts to oil supply rather than a mere extension of the existing scheme to March 2018, and there are already doubts that producers will stick to the agreed targets. 2. US shale oil supply has been boosted by lower production costs and stronger investment as prices moved away from January 2016’s lows. The US has continued to gain export market share. 3. The return of Libya and Nigeria to the oil market has stymied OPEC’s efforts to curb supply. 4. Despite the start of the driving seasons, demand slipped in Q2 from 97.4m barrels/day to 96.9m as China and India imported less.
Despite the slow pace of rebalancing, we expect prices to return to a $50-55 range: 1. The recent price drop is likely to dent investment in the US shale sector, capping future production growth. 2. The recovery in Libyan and Nigerian production may not be sustained. 3. Supply could suffer from geopolitical risks in key exporting countries (e.g., Saudi Arabia, Iraq and Venezuela). 4. The global economic recovery could lead to stronger demand in coming quarters.
"Fading political risks will support gold in coming months but expect limited upside"
Gold has been quite volatile in Q2 with prices moving in a wide $1,220-1,290 range. While political concerns eased after Macron’s victory in France, investors still harbour doubts about the implementation of reforms by the White House and the impact of Federal Reserve tightening on the US economy.
Given its low correlation to other asset classes, gold has been seen as a good diversification tool, spurring inflows into exchange-traded funds last quarter.
Gold should offer limited upside in coming months: 1. The cost of holding gold is set to remain low as we only expect a gradual rise in US real yields. 2. Indian gold demand (nearly 15% of total purchases) should only recover slowly this year. 3. Political concerns in Europe (Brexit talks, German and Italian general elections) have faded into the background for now.
Meanwhile, underinvestment by gold mining companies has limited new sources of supply.
All in all, we still target $1,225 in 6 months but raise our objective to $1,250 in one year.
Sources: SG Private Banking, Datastream (30/06/2017). 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.