Delta risks coming to the fore

Oil prices have been on something of a round trip this week – falling at the start of the week as OPEC+ finally agreed to a new output agreement and the ongoing spread of the Delta variant fuelled concerns over the global economic outlook, and then rebounding in the second half of the week as risk appetite recovered. Stepping back from the rollercoaster, however, the events of the week support our view that the rally in oil prices from their pandemic-induced lows is now nearing its peak. We suspect Brent crude will remain in a range of $70-75pb over the next 3-6 months, before dropping back to a $60-70pb range in 2022. And we continue to expect the prices of most other commodities to weaken over the next 6-12 months too. The spread of the Delta variant is likely to remain front and centre of investors’ concerns over the next week, but the FOMC meeting, which concludes on Wednesday, could also have bearing on commodity markets. In our view, the fact that the Fed is preparing to potentially tighten policy underscores the divergence between the US and other major economies, which we think will continue to push the US dollar higher in the year ahead and weigh on commodity prices.