A cross-border affair

The last few years have proved challenging for commodity markets for a variety of reasons, but of primary significance has been the impact of slow growth and its effect on demand.

During the three years from 1 July 2012 to 30 June 2015, the Commodity Research Bureau index has fallen 10.61 per cent (in sterling terms). This is in stark contrast to the returns from equity markets such as the FTSE 100 (+30.38 per cent) and S&P 500 (+60.99 per cent) over the same period.

Many analysts have focussed on economic variables and, in certain instances, have neglected the geopolitical factors that can have a significant impact. Nevertheless this is a trend that is likely to change as geopolitical factors begin to exert a greater influence on the outlook for broader commodities. This is particularly the case given the current price of oil.

Political pacts

This has recently been highlighted in the agreement reached to lift economic sanctions on Iran. Given the situation at the time regarding Greece, this development did not get the air time it warranted, but the impact could certainly be significant.

Iran has the fourth largest proven oil reserves and the ability to access these reserves as easily as its oil producing counterparts.

With sanctions lifted, the most likely outcome is that Iran will increase its oil output from its current 2.8 million barrels a day, to its pre-2012 levels (the last tightening imposed by sanctions) of 3.5 million barrels a day. Over the long term, Tehran's official output target is five million barrels a day by the end
of 2020.

This is likely to challenge the strong control OPEC has previously held in manipulating the oil price, by adding further competition. Thus this change in the geopolitical situation will likely impact the supply dynamic for oil, reducing its price.

Going forward, there is potential for a further increase in supply if geopolitical conditions stable in countries such as Russia.

Trickling through new streams

Whether oil prices will continue to fall will also be determined by demand. The slowdown in growth of China and other parts of the emerging markets, coupled with new technological advances and innovations in energy coming to the fore, may not provide the demand element to offset this addition of supply mentioned above.

Furthermore the current perceived lack of demand and concern regarding the price of oil is reflected in recent decisions by the world's energy groups to shelve around £200bn of new projects. This has been an attempt to minimise costs and protect investor's capital.

Historically it has been far easier to control the rise and fall of oil prices through the supply element, rather than the demand components. However where there is a structural supply change, a lower oil price is likely to follow.

This will of course be a positive development for global consumers, where the lower cost of energy is likely to support a greater disposable income level, which if not saved, will help continue to boost developed markets economies in particular.

Whether these specific scenarios play out or not, what is clear is that regardless of how difficult we may find it to analyse them, we can't ignore the effect that geopolitical influences will have on investments - especially now that the status quo appears to be changing so drastically. 

Claire Bennison is regional director at Brooks Macdonald in Manchester

She writes a regular in-practice article on asset management for Private Client Adviser