The hiatus around Christmas and the New Year usually proves to be a muted affair. Whilst there was nothing unexpected or untoward this time around (Russia’s callous attack on Ukraine on Christmas Eve and New Year's Eve atrocities have become the new norm, alas), our market was indeed upbeat and buoyant. Over the last two weeks, the major oil futures contracts have gained more than $4/bbl. The move higher came despite US gasoline and distillate inventories built meaningfully – by 9 million bbls and 5 million bbls respectively since December 13, (although crude oil stocks dropped by 5 million bbls). Possibly three developments provided invaluable support in the last two weeks. European natgas prices shot 10% higher as Ukraine stopped Russian gas transit to Europe via pipelines. The possibility of the coldest January in the US for a decade is also seen as a helpful factor, particularly for heating oil. Announced Chinese stimuli, in the form of increased wages for government workers and a sharp increase in funding from ultra-long treasury bonds were also well-received. The year kicked off seemingly full of optimism but the critical date, which can upend the most carefully constructed forecast, the inauguration of Donald Trump, is a mere two weeks away.

Do Mention the War

Anyone with a shred of human decency would believe the saying from the Italian dictator, Benito Mussolini – It is blood which moves the wheels of history! -  is a fallacy. Yet, when one looks back at 2024, one will realize that the year was characterized by bloodshed in several hotspots of the world, including Ukraine, the Near East and Sudan. The Sudanese civil war is the most tragic out of the three as the conflict between rival factions cost the most civilian lives. Given the political and economic importance of Ukraine and Israel, it is the latter two that had a much more profound impact on financial markets. The key takeaway must be that waging war against one’s neighbour with impunity is an increasingly accepted political tool as the battle for global political and economic domination continued in 2024. There is absolutely nothing that justifies Russia’s invasion of Ukraine but last year saw the invader gaining the upper hand. The abhorrent attack of Hamas on Israel on October 7, 2023, entailed a fierce and understandable retaliation from the Jewish state, which spread over to Iran and Lebanon, but some would argue that the extent of it was disproportionate as it claimed more than 45,000 lives in Gaza alone. Wars will plausibly remain decisive geopolitical factors in 2025.

The other defining feature of 2024 was elections. More than 1.5 billion people voted in 73 countries last year. Most of these elections, including the most consequential one in the US, were legitimate and fair. A few of them, particularly in Russia and Venezuela, were illegitimate and even absurd. The most salient repercussion of the elections was the damning verdict of the electorate on the incumbent. Elections resulted in the rise of the populist right in general, as voters, in no uncertain way, expressed dissatisfaction with inflation, sluggish economic growth and immigration, amongst other things.

Notwithstanding these outcomes, there was a tangible chasm in the views of the voters and investors. Ailing economies that led to the fall of the incumbent were not reflected in the performances of major stock markets. Chinese troubles, for example, were well-publicized throughout 2024. The world’s second-biggest economy struggled to fulfil its pledge to expand by 5% as deflationary pressure and the reluctance of the ruling party to stimulate the domestic economy acted as a brake on prosperity. Yet the Shanghai Composite Index returned more than 12 cents on every dollar over the year, a respectable performance, at least compared to bond yields.
Europe had its own difficulties to deal with. Political horse-trading in Germany and France was undoubtedly the source of anxiety. During the summer EU parliamentary elections, the growing acceptance of right-wing political parties with all their populist pledges should have caused unease amongst investors. Despite the palpable advance of the populist and far-right the German stock market finished 2024 19% higher beating the MSCI All-Country Index (+16%).

The shining beacon, however, was the US. Although the Biden administration suffered a resounding defeat during the November presidential election inflation was reined in, the labour market proved healthy, and the central bank started to lower the cost of borrowing. No doubt, 2024 was the year of artificial intelligence as mirrored in the 29% rise in the Nasdaq Composite Index whilst the combined value of the country’s 500 most valuable corporations increased by 23%. The dollar also echoed a strong domestic economy as its index against its six peers reached 108.30 by the end of the year, an annual jump of 7%.

Oil was not able to emulate the performances of equities. There was a discernible divergence in oil demand forecasts between OPEC and the IEA throughout 2024 with the former being much more sanguine than the latter. What is striking about the individual futures contracts is that crude oil fared much better than products. WTI and Brent returned 9% and 5% respectively (including monthly roll-overs). This compares with a rise of less than 1% in RBOB and Gasoil. Heating Oil produced a negative return of 6%. It insinuates that whatever support there was in 2024 it must have come from geopolitics whilst underlying fundamentals remained sluggish. It is confirmed by the OPEC+ decisions to keep delaying the re-introduction of barrels voluntarily taken off the market despite the producer group saw global stocks declining around 1.6 mbpd last year.

This would be 2024 in a nutshell. There was no harmony and no rhythm to the markets last year, which was dominated by confusion, uncertainties, and a growing number of “known unknowns” and “unknown unknowns”. Using the major driving forces of 2024, in tomorrow’s note we will attempt to foresee what will keep markets pre-occupied in 2025.

Overnight Pricing