Barrels of Tomorrow: Brent’s Chronicles in 2024

04 Jan 2024

By Priyanka Sachdeva, Senior Market Analyst for Phillip Nova

Inflation rates have significantly dropped globally, approaching targets. However, it’s unlikely that central banks would cut pre-emptively without a substantial economic slowdown. Historical records caution against premature celebrations by central banks, as in those examples inflation plateaued at an elevated level before accelerating once more.

The main challenge for oil markets in 2023 has been the strong US Dollar, making oil investments expensive. Although oil players are optimistic about rate headwinds easing, concerns about rising transit costs and disrupted supply in the Red Sea are currently in focus.

The Biden administration earlier lifted sanctions on Iranian oil supplies, redirecting millions of dollars, which are now linked to Hamas’ attacks on Israel. Restricted oil tanker flow from the Red Sea, the ongoing Russia-Ukraine crisis, and extended OPEC+ supply cuts are expected to keep the supply-side narrative in check. Despite Brent trading with almost 9% year-to-date losses, any significant rally would require improved demand. With Chinese demand already above pre-pandemic levels and the upcoming winter season, a substantial demand pickup is not expected in the first quarter of 2024.

Markets have priced in expectations of modest economic growth and a “soft landing” for inflation, but 2024 may be a “tale of two halves”. The first half may be cautious for oil prices, giving way to stronger performance in the latter part of the year. Oil is forecasted to trade at relatively flat prices as dented demand owing to elevated rates somehow balances restricted supplies after OPEC’s voluntary cuts in 1H2024. However, the ongoing Geopolitical tensions in the Middle East can flip the delicate balance any day.

Looking at the technical chart, we see a triangle forming when we draw a line in red connecting the recent lows and a line in green connecting the recent highs. A “Sell on Rise strategy” is recommended as long as the strong USD obstacle persists.

If global oil demand remains flat in 2H2024 and OPEC+ refrains from deeper supply cuts, oil prices may face immense pressure. However, a tighter market is predicted in late 2024, with demand expected to grow by 1 million barrels per day. Brent is expected to average slightly over USD90 a barrel in 2H2024, but downside risks exist if Saudi Arabia decides against rolling over voluntary cuts. Stricter US sanctions against Iran could provide an upside to forecasts.

Beijing’s struggles to find a new economic engine contribute to weakness, affecting oil demand despite the Chinese government’s efforts to stimulate the economy. With 2024 being a year of elections globally, political uncertainties may act as headwinds for oil prices. Persistent challenges are anticipated for oil markets in 2024.

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An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12^th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

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