The question of whether we will see oil prices reach $100 and whether they will remain at that level is a topic frequently discussed at the moment. The most important message here is that we are in a market characterized by a deficit. On one hand, there has been insufficient investment in the oil market in recent years, and on the other hand, the demand is currently very high. This scarcity is reflected in the price, which is not surprising. The sharp increase in oil prices to nearly $100 was anticipated.

The higher the oil price rises, the higher the likelihood of a setback. There are several reasons for this. For instance, if we look at the 14-day average of the Relative Strength Index (RSI) before the price decline, we observed a level of more than 70. This indicated that a downward correction was overdue. Technical indicators showed that the market was overheated and overbought. But the main reason for the risk of a setback is the policy of OPEC plus itself. The deficit in the market is largely due to significant production cuts by Saudi Arabia and Russia. This is quite an aggressive supply management by these two states, resulting in a significant initial price increase. However, we will eventually reach a point where high prices start to reduce demand. At that level, the providers jeopardize their own sales because the high price level decreases demand. Thus, the suppliers risk their own mid-term goal of stabilizing the market. It means that major providers like Saudi Arabia and Russia do not aim for a very high price level in the oil market since it would significantly reduce demand.

Yes, this pertains to geopolitics. In November next year, the US will elect a new president. One of the key indicators for the election outcome has always been the price of gasoline in the country. Currently, it is heading towards $4 per gallon. This is considered a critical level where the US government becomes nervous because consumers' disposable income in the US is significantly affected. Additionally, central banks, especially the American Federal Reserve, are a significant factor. Higher energy costs mean higher inflation. As a result, interest rates must remain high for a longer period, ruling out immediate interest rate cuts. This, in turn, leads to a higher value of the Dollar, and there is a well-known negative correlation between the oil price in Dollars and the value of the Greenback. All of these factors provide reasons why the oil price could stay in the range of $85 to $95.

Considering that the situation is very dynamic, it is observed that there has been no impact on global oil production so far. We also do not expect strong short-term effects on the fundamental aspects of the oil market. Nevertheless, the oil market has begun to factor in geopolitical risks, given the uncertainty about how events will unfold.

In the longer-term perspective, we are looking at two aspects. Firstly, we anticipate a slower-than-expected reduction in Saudi Arabian production cuts if there is a delay in the Saudi-Israeli rapprochement. Secondly, there are risks regarding Iranian oil production if the enforcement of sanctions against Iran intensifies. Overall, these two effects are bullish for oil prices.

In summary, we are experiencing stagflation. We see a slowdown in the economy in the US and Europe, but not a strongly pronounced recession. This is seen, for example, in the purchasing managers' indices, which have fallen below the 50-mark indicating contraction but haven't plummeted significantly. At the same time, we have higher inflation mainly due to energy prices. For investors in commodities, it's essential to know that this is a very positive environment for commodity investments. Stagflation means that demand is still higher than supply, whereas a deep recession would mean that demand falls behind supply. In stagflation, unemployment rates are not excessively high, allowing consumer demand to remain relatively robust. The 1970s serve as a notable example of a stagflation period when investing in commodities proved to be the most effective hedge against losses. Commodities outperformed stocks, bonds, and practically all other asset classes. We believe that there will be similar conditions to the 1970s in many ways at present.

Looking at the Green Economy we are aspiring to, there are far too few investments in environmentally friendly metals. Therefore, in the upcoming decade, we expect a new wave of inflation caused by insufficient investments in the green transition. In the 1970s, we had a double peak of inflation, and we believe it will happen again this time. The second peak of inflation, which is yet to come, will not be caused by energy prices but by metal prices. We need copper for electromobility, for heat pumps, basically for the entire transition to the Green Economy. However, copper production is relatively dirty. So, we are dealing with an unorganized transition to a more environmentally friendly economy, resulting in the necessity for prices to rise.

This concerns the prices of physically available commodities. When demand for these commodities is high, the prices are high. In the case of stocks and bonds, even those of commodity companies, the pricing is based on future expectations. If there is high nervousness in the market, there can be a sharp price drop. Hence, in an environment of stagflation, we prefer investments in physically available commodities.

The CEO of the American shale oil producer Continental Resources recently stated that an oil price of $150 can be expected unless there is stronger investment in shale oil production. The question here is where the investment funds will come from. The shale oil industry's most important lesson from the Covid-pandemic is the emphasis on value over volume. Before the pandemic, the industry in the US borrowed a lot of money from banks, and the balance sheets were very poor. Many of the companies went bankrupt during the crisis or consolidated. What remained are solid companies with no plans to significantly expand their production.

OPEC plus will eventually feel pressure from the demand side, indicating that as prices rise and supply becomes scarcer, their production might not be absorbed anymore. The situation would lead to demand destruction due to the high price levels. OPEC plus will aim to avoid this scenario. The threshold at which this could happen is likely around $90 to $95 per barrel. If we take a closer look at Saudi Arabia, the largest OPEC producer, the country's budget is balanced at around $80 per barrel. It is predicted that sometime in the coming year, possibly in February, OPEC plus might implement a modest production increase, likely around 200,000 barrels per day. However, this increase would be implemented cautiously to prevent a sharp drop in prices. Conversely, OPEC plus would promptly implement production cuts if a significant recession occurs, which would be contrary to our expectation of stagflation.

Sales of Russian oil have largely remained unchanged, mainly due to years of insufficient investment in the global oil sector. An important factor here is that payment for Russian oil is now largely in Indian Rupees and Chinese Yuan. The sanctions, however, are related to the US Dollar and the Euro. As long as there are no secondary sanctions imposed on India and China, Russia will be able to continue selling its oil. In this regard, it can be said that the current US administration is more cautious about secondary sanctions in the oil sector than the Trump administration, which imposed strict secondary sanctions. Nevertheless, the fundamental question remains: How effective can sanctions be in the new multipolar world order?

Let's look at copper as the most crucial industrial metal. There might be short-term oversupply in the market, but in the long term, the prospects for copper prices are very good due to the enormous demand driven by the world economy's green transition and the proliferation of electromobility. The same applies to aluminum, where there is also an expectation of high demand in the long term. In the short term, these are cyclical markets, and the situation in China is the most significant influence on prices. Currently, the slowing pace of Chinese industrial production and the crisis in the real estate sector mean that demand for industrial metals is not as strong as expected by most market observers. Therefore, the anticipated boom after the end of the Covid restrictions has largely failed to materialize. But there is also the weak economic development in Europe, with a significant risk of deindustrialization, especially in Germany. For instance, in the case of copper, there is a price cap at around $8,500 per ton. But out of a long-term perspective, the copper price should actually be around $10,000.

Ehsan Khoman is the Head of Commodities, ESG, and Emerging Markets Research (EMEA) at the major Japanese bank MUFG based in Dubai. He studied Economics at the University College London and the University of Warwick. He began his career in the research department of the Corporate and Investment Banking division of Société Générale and has since gained 15 years of experience in the financial industry. He joined MUFG in 2016. His hobby is horology, and he owns a collection of antique watches.