Investment, Market news | 18 September, 2019

Oil and geopolitical risk

Alberto Villasán Investment and Markets Director

The global economic deterioration forces to lower the reference rates

The global economic downturn has once more obliged the U.S. Federal Reserve (Fed) to change its monetary policy and begin to cut its official rates.

Geopolitical risk increases…

A number of attacks took place on Saudi Arabian oil refineries over the weekend of September 14, causing their partial closure and reducing by half the country’s daily output.

This unpleasant incident, added to others from the recent past, make it clear that the political situation in the Middle East is far from being resolved and that, most likely, the tension and geopolitical risk in the area are a long way from disappearing.

…affecting the price of certain commodities in the short term…

The first reaction of the financial markets to an event of this nature is a sharp spike in the price of oil, which in this case saw a rise of around 10% the day after the attack.

This reaction seems logical since Saudi Arabia produces more than 8% of the world’s oil and it could be the first step towards a major escalation of its conflicts with other oil-producing countries in the Middle East. We should not even rule out price rises in other typically defensive commodities, such as certain precious metals, like gold.

…although its long-term influence is very low…

Although, as investors, we must bear in mind that these effects are normally short term and that commodity prices are more affected by long-term changes in supply and demand than by temporary or short-term factors.

Normally, the strength of the economy – which implies higher or lower demand – and inflation – which directly impacts on asset prices – are the factors that determine long term commodity prices.

…we do not see basing investments on it.

For this reason, we do not see a clear investment opportunity in commodities at these levels, nor would we advise buying on the basis of increased global geopolitical risks, even though we believe that these risks could remain present on a structural level.

With respect to the two variables that determine commodity prices, we do not think that we will see a lasting rise in inflation and we have serious doubts about the strength of the economy; given global debt levels and the current position of the main economic indicators.

If you need more information, your trust manager is ready to answer any additional questions that may arise.

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