Key trends: Rise in oil prices reflects not only demand normalisation but investor hedges against inflation, says expert
The commodity sector, including oil, has been rallying since early November on the back of a vaccine-led optimism about the demand outlook, but investors should also watch for short term risks that may halt the bull commodity market, according to Saxo Bank’s Head of Commodity Strategy, Ole Hansen.
Speaking during an online briefing on the prospects for a new commodity supercycle hosted by Saxo Bank, Hansen said that the biggest risk of inflation in a decade is creating a paper demand from investors looking to commodities as hedges against inflation.
Oil prices are also rallying on an expectation that people around the world will start travelling and consuming more going forward - as restrictions concerning the Covid-19 pandemic hopefully lift as vaccination programmes are rolled out - which will drive significant demand for oil.
“Tangible assets with a strong fundamental backdrop like oil copper and other commodities are in huge demand right now. Rising bond yields have triggered an emerging shift from momentum stocks, such as those from tech companies, back into value stocks which commodities producers are a part of.”
The rally in oil prices is generally seen as positive for GCC economies which have been suffering from the impacts of the Covid-19 lockdowns such as lack of tourism.
“The increased oil-based revenues will help to give local economies some breathing space during a difficult economic time, but governments must not be complacent,” said Hansen.
“It’s important to remember that the green transformation such as the move to electric cars, was initially kicked-off when oil prices reached in excess of $100 a barrel. It was at this point that consumers realised the green alternatives were no longer excessively expensive.”
“If we go through a period for a number of years where oil prices rise to be higher than previously expected this may further incentivize the green transformation and the weaning off fossil fuels.”
Hansen also highlighted the increasing risks of conflict within Opec+ nations saying that elevated prices depend on sticking together. Brewing discontent between the two nations put this at risk. Likewise, Chinese demand is potentially not going to continue the same trajectory as it has in recent months.
China has utilised low prices to stock up on oil and this could mean demand may not be as strong in the next period.
“This oil rally is one that has multiple legs and some of these legs may be chopped off creating short term risks and short-term adversity. However, I am not yet going to jump off the bull wagon,” said Hansen.
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