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Commodities

Commodity markets in spotlight as geopolitical conflict rolls on

High oil prices are outweighing demand growth in the US. Despite the historically busy summer period, demand is staying at multi-year lows, comparable to periods when WTI prices were high. The need for European markets to find substitutes for Russian oil is exerting a strong pull on US crude and product exports.

Oil: Citi expects oil prices to continue being volatile, but with a clear downward bias through the end of the year. Given the uncertainties of conflict, there could be further supply disruptions from Russia this year. However, given the strong headwinds to growth resulting from both higher prices of commodities and central bank actions, Citi projects a trendline downward in prices through 2023. While Brent prices are swinging between $114-124 so far in June, and could remain spiky through the summer, Citi’s base case is that prices could ease to the 80s by 4Q’22, and could be in the $70s in 2023, trending down to the USD50-60 per barrel range thereafter.

Citi Oil Price Forecasts

Gold: Gold markets are not likely to inform financial markets of imminent recession. Whereas rates, inflation, and FX are co-determined with some commodity prices (e.g. crude oil), gold prices are reactive. Yet the negative performance of gold in recent months does not contrast with mean or median annualized returns preceding significant US growth contractions over the past four decades. Citi maintains a 3Q’22 gold price forecast of ~$1,845/oz, bottoming to an average of ~$1,750/oz in 1Q’23, and then rallying to $2,000/oz into 2024. The US falling into recession (sooner than later) might see gold prices rally a bit sooner.

Bulks and metals:  In the scenario that global growth continues to weaken over the next 3-6 months, zinc and nickel appear to have the furthest to fall in percentage terms, while aluminum the least. Citi expects Chinese smelters to be responsive, as Chinese steel mills have been, to ongoing weakness in the market in China, and in line with recent history.