Key Insights: US recession and global liquidity / banking crisis triggered by US Housing market crisis and US bank failures is expected anytime from October to December 2024. This would in turn trigger a global recession similar to the Global Financial crisis of 2008. Since the demand would go down in a global recession the prices of many commodities and metals including crude oil is expected to drop by a substantial percentage from their recent peaks. However if there is a partial / full scale war in the middle eastern region which is the key supplier of crude oil then the prices could spike up drastically during a short span and then fall drastically subsequently when the critical situation cools down/ nears end.

Actionable recommendations for businesses connected with crude oil (either supply side or demand side):

If crude oil is a key raw material for any business then the buying organizations can cover their positions for orders secured by entering into futures transactions or buying / selling options as appropriate by comparing the cost of those derivatives against the expected future fall in prices. Alternatively if they have leeway in the delivery date and the manufacturing cycle time then they may time their procurement so that they can take advantage of the fall in market prices of crude oil.
If crude oil is a significant cost component of the final product sold by the business organization and if those final product prices are influenced by significant changes in crude oil prices then they may secure their selling prices for inventory at hand / current purchase positions by entering into futures transactions or buying put options by comparing the cost of those derivatives against the expected future fall in prices. Alternatively they could enter into long term contracts with their customers wherever possible so that they could lock in the prices of the final products.

Disclaimers and Limitations

Purpose:

This report is designed to support the strategic and operational decision-making of business managers / entrepreneurs regarding their business. It should not be used as the sole basis for any investment, trading or financial decisions.
“Value Relay Private Limited” has made this report available to those who have purchased this report, to support / aid in their view regarding future market conditions of their business / products related to their business and the evaluation of strategies that could be deployed in those scenarios.
The report is meant for the said purpose only. This report should neither be placed before any third party nor be made available for circulation except to the management of the Company/ organization for which this report has been procured, as may be required for the said purpose.

Content:

Disclaimer:

This report is for informational purposes only and does not constitute trading advice. “ Value Relay Private Limited” has prepared this report based on information believed to be accurate and reliable. However, we make no warranty, expressed or implied, regarding the accuracy, completeness, or usefulness of this information.
The forecasts and analysis contained herein are based on current data and market conditions, which are subject to change. The report is intended to aid management in decision-making and should not be relied upon as a sole source for investment decisions."
"The predictions and opinions expressed are those of the authors and may not represent the views of the organization as a whole."
This report contains forward-looking statements that involve risks and uncertainties. These statements are based on current expectations, estimates, and projections about the industry, market, and economic conditions, as well as the beliefs and assumptions of the author of this report. Such statements are not guarantees
Readers of this report should exercise their own independent judgment and seek professional advice before making any financial or business decisions. “Value Relay Private Limited” disclaims any liability for any loss or damage arising from reliance on the information contained in this report.

Limitations:

The accuracy of this forecast is limited by the availability of market data and potential unforeseen geo-political or economic events.
Past performance is not indicative of future results. Price volatility and market dynamics can lead to different outcomes than those forecasted.
Assumptions made in this report are based on current economic indicators and may not hold if there are significant changes in market conditions.
The probabilities of the forecast (namely high, moderate and low) are made only to highlight the relative weighting of the individual forecasts in relation to other forecasts in the views of the author and are not backed by any data or survey.

Market Overview

As on 27th September 2024,Brent decreased 5.65 USD/BBL or 7.34% since the beginning of 2024, according to trading on a contract for difference (CFD) that tracks the benchmark market for this commodity. Crude Oil reached a high this year of 91 $ (BZ:NMX) in April of 2024 from 75.6$ per barrel in January 2024.

The drop in oil prices also reflects broader concerns about weakening demand from China, the world's top oil importer. Recent Chinese economic data showed slowing growth, falling home prices, and rising unemployment, prompting a reduction in crude processing rates by Chinese refineries. Additionally, the Organization of the Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) have both lowered their oil demand growth forecasts due to China's economic softness.Reports as of the last week of September 2024 indicated that Saudi Arabia, the world’s top exporter, is prepared to abandon its unofficial $100 per barrel price target and increase production in December, even if it leads to sustained lower prices. This follows an anticipated supply increase from OPEC+, with output hikes set to launch in December after a two-month delay. Further pressuring prices, Libya's crude fields are expected to reopen soon after government factions agreed on a new central bank governor, resolving the standoff that had halted oil production and exports. Demand concerns also persist in China, despite recent monetary measures aimed at boosting activity and energy demand in the world’s largest crude importer.

II. Price Forecast

Our Forecast on copper prices during the period 1st September to 30th November :

The lowest price range that Brent Crude Oil price could go by November 30th 2024 is

High Probability = *** $ per barrel or less

Moderate Probability = *** $ per barrel or less

Low Probability = *** $ per barrel or less

The highest price range that Brent Crude Oil price could by November 30th 2024(from 17th August 2024 to November 30th 2024) is

High Probability = ***$ per barrel or less

Moderate Probability = ***$ per barrel or less

Low Probability = ***$ per barrel or less.

Factors Influencing the price forecast

The US economy, which is the global leader, is on the verge of a recession. The yield curve which is US 10 year constant maturity minus 2 year treasury constant maturity (see Appendices Fig 1) has been uninverted and very near the zero level as on 26th July 2024. Historically, almost all the time when the yield curve had inverted the US had entered the period of recession within a couple of months. Once the US officially enters recession it will have an effect on global economies because the United states is the largest economy and has strong trade and financial linkages with many other economies. Further the US dollar is the dominant world reserve currency. Due to these factors most of the globally synchronized recession episodes also coincide with US recessions.

The unrealized losses on securities at commercial banks in US, remain elevated and are at a staggering level of around 700 to 500 Billion $ when compared to the same measure during the Global financial crisis in 2008 (please see Appendices Fig 2) which was around 75 Billion $. The problem of unrealized losses becomes exacerbated when some crisis happens and these unrealized losses become realized. For example, the Silicon Valley bank crisis which happened in March 2023 where there was flight of deposits or the recent Norinchukin bank case where the borrowing costs /funding costs are lot much higher now than they were in 2020-21 when compared to the yield from the treasuries they hold as assets were bought. So in order to pay for the higher borrowing cost they had to sell the treasuries they were holding at a huge loss and so the unrealized losses became realized losses. Further they have to invest the proceeds from treasuries sales assets which will yield more than their high funding costs like Collateralized Loan Obligation (CLO) derivatives or loans on commercial real estates which are extremely risky in the current market scenario. These factors would eventually lead to more bank failures.

The credit risk of all the US commercial real estate loans on the balance sheets of the banks. The delinquency rates on US commercial real estate loans in the last 5 years (see Appendices Fig 3) is increasing at a staggering phase well above the levels seen during covid in 2020. These are fast approaching near the levels which were there just before the start of the 2008 Global financial crisis.

Counterparty risk: The global banks balance sheets are interconnected in a close network which is very fragile. These networks became more close and fragile after the Euro dollar system came into place in the 1950s and 1960s. In this network if one or few of the systemically important global banks goes down then that could be the last straw that breaks the camel's back which would take down the entire global banking systems liquidity. As a result we could have a global banking crisis now which could be similar or more worse than the global financial crisis which we had in 2008.

A partial / full scale war involving the middle east which is a key supplier of crude oil can cause significant disruptions in the supply side of crude oil and result in a dramatic spike in crude oil prices in the short term. However we expect a drastic fall in crude oil prices subsequently as the situation cools down / nears end, due to the reduction in demand due to global recessionary trends.

The trigger event / black swan event could be banks having to realize the unrealized losses as explained above or US commercial real estate crisis or it could even be the US Federal reserve dropping the interest rates. It could be any significant trigger but the scenario is ripening for a global liquidity crisis / recession in the next 6 to 9 months. Once that happens the assets (stocks / commodity) prices could go down in the short term and may recover over a period of time according to the financial liquidity injected into the system and the shifts in economic outlook of the major countries that drive the global economic growth.

We have made our price forecasts based on the factors explained above and the resultant scenario forecasted.

The high probability forecasts for the lowest price range are based on the assumption that the downward trend could be like the one witnessed during the global financial crisis of 2008 (Appendices Fig 4), only with varying intensity of the trend effect which could happen due to the Quantitative Easing interventions that could be made by the US Federal reserve. The moderate probability lowest price range forecast prices are based on the assumption that the downward trend could be like the one witnessed during the 2022 2nd half downtrend witnessed in the crude oil market. The low probability lowest price range forecast prices are based on the assumption that it follows the same downward trend which is being witnessed from May 2024 in the crude oil market.

The high price range forecasts (both high and moderate probability) are based on the assumption that due to tensions / war fears in the middle east there could be an increase in volatility / prices. In our view due to the declining global demand even if there are significant disruptions in the supply the price limit by which it could increase in the crude oil market may be capped, so we have accordingly adjusted the high price range forecasts in this scenario. The low probability for high price range forecasts would kick in only if there is a partial / full scale war involving the middle east region. In that case the crude oil prices could go up to the forecasted levels when the war begins and may drastically fall When the war nears a decisive end / cools down.

Key events to watch for

Escalation of the conflicts in the Middle East( Especially the Israel - Iraq tensions) , which is a key oil producing region, can disrupt the supply and push prices higher. The situation becomes more critical if there is a partial / full scale war involving the Middle East countries which are significant producers of Crude Oil.

The US Federal interest rate cuts which could happen in September 2024 or to a lesser extent in the end of August 2024 through an unscheduled meeting in August 2024. Once the US Federal reserve starts cutting interest rates and the recession indicators like the US unemployment rate goes up / there is no signs of improvements in the economy then an official US recession would be announced. This could be the start of global financial liquidity worsening.

The US presidential elections that are happening in November 2024. If there is a change in regime or certainty of change in regime then the scenario could unfold in September / October 2024 just before the US presidential elections or at the most immediately after the change in regime in November / December 2024. If there is no change in regime (ie. if the same party continues in power in the US) then the scenario could unfold anytime before the end of 1st quarter of 2025 (ie. by 31st March 2025).

Any of the systemically important global banks / financial institutions failing in the coming months like the collapse of the Lehman brothers in 2007 or the Long-Term Capital Management (LTCM), the hedge fund that blew up in 1998.

III. Risk Analysis for the Forecast

If there is War in the middle East region ( either partial or full scale) then the Lowest price range forecasts given above may not fructify in the next 3 months and they may be shifted further down the line, whereas the high price range forecasts may fructify and in fact the prices may go up to what we have forecasted as low probability in the high price range.

If the US Federal Reserve is able to successfully intervene and manage to prevent bank failures by taking appropriate actions like bailouts, funding programmes etc then the global banking crisis which is forecasted to happen could get delayed and may not happen within this report’s forecasted period( ie. November 2024). As a result the high probability Price Forecast for lowest prices given above may not fructify in the forecasted period.In that case the low probability forecast given above for lowest price range may happen.

If there is no regime change in the US Presidential elections (ie. the same party retains the power in the forthcoming US Presidential elections) then there is a possibility that the failure of systemically important banks / financial institutions would not be allowed to happen in 2024 and the same may happen only in the 1st quarter of 2025. As a result the high probability Lowest Price range Forecast given above may not fructify in the forecasted period. In that case the low probability lowest price range forecast given above may happen.

IV. Strategic Implications for Management

Strategies for Procuring Organization

Selling Price Protection Strategies

V. Conclusion

The Global Financial indicators indicate that a US recession / global banking / liquidity crisis could be triggered any time within the next 6 to 9 months.This in turn is expected to intensify and widen the global recessionary trends to sap the global demand. This crisis has more possibilities to loom out into a crisis similar to the Global financial crisis of 2008. So the current falling trend of crude oil prices is forecasted with the baseline trend of 2008 financial crisis along with the expected Quantitative easing interventions by the US Federal Reserve as witnessed in the aftermath of 2008 financial crisis and the 2020 covid / global lockdown crisis.

In this scenario, the Crude oil prices have been forecasted to reach 40$ per barrel or less (high probability) / 57$ per barrel or less (moderate probability) by the end of November 2024. If there is a delay in such a crisis looming out due to successful intervention by the US Federal Reserve or the demand levels for crude oil improving in China which is the major consumer of crude oil in the world then the low probability forecast of around 64$ per barrel could play out. On the other hand, if there is partial / full scale war in the middle east region which is a major supplier of crude oil then the crude oil prices could spike up to 123$ per barrel or less during the forecasted period and drastically fall thereafter when the war reaches near the conclusion / cools down.

Effectively hedging against crude oil volatility is crucial for businesses reliant on this raw material. In a falling crude oil prices market, businesses dealing with crude oil-related products have various strategies to mitigate risks and capitalize on opportunities. By employing a combination of futures, forwards, options, swaps, and tailored strategies companies can protect themselves from falling prices while ensuring stable and predictable procurement costs, selling prices and profit margins. Further they can manage inventory levels, plan production schedules as per the expected demand, implement cost reduction and improve operational efficiency.

Appendices

(Figure 1)

Figure 2

Figure 3

Figure 4

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