Oil prices unlikely to witness extended drops this year

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Any extended drop in oil prices may be unlikely this year, according to analysts at Forex.com.

For most of the first quarter, WTI ranged between $70 to $83. Yet, recent market turbulence surrounding the implosion of Silicon Valley Bank (SVB) pushed oil prices to a 15-month low. “Currently, oil’s upside potential would be capped by slower growth and high inflation, while its downside potential would be capped by Opec’s willingness to support prices with a break into the $60s. demand and supply dynamics, especially that China’s reopening continues to support demand; and the possibility of central banks cutting rates eventually, which might push the WTI up to the $90+ range,” Forex.com analysts wrote in a note.

“Oil prices have been steady and consistently over 60 dollars per barrel and it seems that Opec plus is ready to cut production in the event that prices fall below that. Therefore any extended drop in prices may be unlikely this year,” Ritu Singh, Regional Director, Forex.com, told Khaleej Times.

On the equity front, equity and commodity traders were quick to rejoice on news of China’s reopening in early January, whilst yen traders were treated to an out-of-meeting policy adjustment which gave currency markets a jolt. And whilst geopolitical tensions have somewhat receded, they have now been replaced with fears of contagion and central bank pivots.

The UAE market performed really well in the past 12 months driven mostly by the flurry of high quality IPOs, which is likely to continue this year as the market already had a couple of blockbuster IPOs the latest of which was Al Ansari Exchange which was 44 times oversubscribed for the retail tranche. Over the past 12 month, the market capitalization has reached Dh3.3 trillion with a total revenue of Dh655 billion and total earnings of Dh184 billion as of May 9. The price to earning ratio is at 18.2 which is lower than the 12 month average of 20.30, Singh noted.

For gold, forex.com analysts remain bullish on the commodity for Q2, but they confirm that things are not going to be simple. Headline risks remain a key driver for gold, which makes it more of a trader’s than an investor’s market for now. The gold’s inverted relationship with bond yields and the US dollar are as strong as ever as the debacle surrounding Silicon Valley Bank and concerns over contagion played out. However, if appetite for risk improves and central banks remain hawkish, gold might hand back its recent gains. Central banks, China and India are expected to continue to provide support for gold and the futures curve remains in contango, illustrating confidence that prices may go up. In a nutshell, upside risks for gold include safe-haven flows, softer inflation and lower interest rate, while downside risks include risk-on environment, higher inflation and higher interest rates.

Forex.com analysts maintain an overall bearish view on the dollar, as the market seems to believe that the Fed will be less aggressive than anticipated. But for the dollar to regain buying strength against its rivals in Q2, another acceleration in the inflation rate might be needed. Yet, a contractionary Fed policy with higher rates could hurt the housing market and provoke job cuts in the tech sector raising unemployment rates, potentially halting the economy and leading to rate cuts. As the US Federal nears the end of the rate hike cycle, the market is pricing in a decrease in rates to 4.35 per cent by the end of the year. “That puts downward pressure on the US dollar and by nature of the peg, on the UAE dirham as well,” Singh said.

Accordingly, the dollar is likely to remain under pressure on the short term, with expectations for the euro and the British pound to outperform. Forex.com analysts envisage a revisit toward 1.1000 on EUR/USD and 1.2500 on GBP/USD.

Singh, says: “Caution is needed in the running quarter, and the outlook across all markets may show once again that traders might need to diversify their portfolio to avoid placing all their eggs in one basket and running big risks on one single market”.