Plenty of supply on the oil market, but only at the right price
After a brief rally in the wake of new US sanctions on Russian tankers, the oil price fell in the first quarter to its lowest level since the beginning of the year. The main headwind came from the supply side. On the one hand, peace negotiations in the Ukraine war and the resulting hopes for more cheap energy from Russia weighed on the market. On the other hand, OPEC+ surprised by reducing existing production cuts despite weak prices. In this environment, the upside potential is clearly limited, especially as global demand growth is expected to remain moderate. At the same time, the downside risk is also limited. Even with abundant supply, US shale oil in particular will become increasingly unprofitable as prices fall. Many OPEC+ members would also face problems financing their national budgets. A continuation of last year’s sideways movement therefore seems likely, although the corridor (previously USD70-90/barrel) is now likely to be somewhat lower.
OPEC+ plans gradual production increases despite low prices
Actual production compared to the official core OPEC quota; estimate of official quota from April 2025 to December 2026
Rising government debt + high uncertainty = gold a ‘must’
With a year-to-date performance of more than 15%, gold is once again one of the best performing assets. The safe-haven asset benefited from several factors. Fundamentally, the weaker US dollar and lower real interest rates provided a tailwind. However, the most important driver in the first quarter was the sharp rise in global economic uncertainty. This time around – unlike last year – demand came from both central banks and international investors. Many of the latter are likely to have missed the rally and have a lot of catching up to do. ETF holdings are still some 25 million ounces (23%) below their highs, while gold is trading at all-time highs. With rising sovereign debt (now increasingly also in Europe), high economic and geopolitical uncertainty and a still uncertain inflation outlook, gold remains an essential asset in our portfolios despite its high valuation relative to real interest rates.
Global uncertainty drives investors into gold
GDP-weighted Global Policy Uncertainty Index by Baker, Bloom & Davis against the gold price in US dollars per ounce
Even more structural tailwind for industrial metals
Industrial metals benefited from higher activity in the manufacturing sector in Q1, but the main driver was the prospect of US tariffs, with US manufacturers trying to import as much metal as possible before the tariffs kick in. In the short term, however, the trade war could also be a drag. Longer term, the outlook for industrial metals has improved once again. In addition to the decarbonisation of the global economy, higher defence and infrastructure spending in Europe and the potential reconstruction of Ukraine should further boost demand, which will be met by tight supply.
Defence spending likely to boost demand for industrial metals
(Estimated) development of global defence spending until 2030
Author
Ludwig Kemper
Ludwig Kemper has been working as a strategist since 2019 and as a portfolio manager since 2021 at Berenberg’s Multi Asset unit. His responsibilities include the generation of investment ideas and the preparation of analyses to support investment decisions. Ludwig focuses on the commodities sector and derivatives markets. Previously, he completed a dual study programme at Berenberg in cooperation with the Hamburg School of Business Administration. In his rotations, he worked in investment banking, equity research and asset management. He received his Bachelor's degree as valedictorian of his class. Ludwig is a CFA charterholder.
Ludwig Kemper
Multi Asset Strategy & Research