Energy commodity prices fall, but geopolitical risks cloud outlook

Brent crude, natural gas, and coal, fell by 9.76% in reais in June compared to May Seacrest Petróleo /Divulgação Energy commodity prices were on a downward trajectory in Brazil before U.S. President Donald Trump threatened new military strikes against Iran on Wednesday, raising concerns that the recent decline could prove short-lived. Prices for energy commodities—including Brent crude, natural gas and coal—fell 9.76% in Brazilian reais in June from May, according to data released Wednesday by Brazil's Central Bank. Oil volatility threatens Brazil’s subsidy phaseout Oil jump pressures Brazilian assets The decline helped pull down the Central Bank’s Brazil Commodity Index (IC-Br), which tracks the prices of agricultural, metal and energy commodities converted into reais. Economists said the drop is likely to be temporary given the renewed escalation of geopolitical tensions. The latest escalation in hostilities triggered another rise in oil prices. September Brent crude futures settled 5.20% higher on Wednesday at $78.02 a barrel. Brazil's benchmark Ibovespa stock index fell 0.79% to 170,653 points as heightened global risk aversion weighed on markets. Metal commodity prices—including iron ore, aluminum, copper, nickel and gold—declined 2.51% in June from May. Agricultural commodities, such as beef, pork, soy oil, wheat, sugar, corn, coffee and cocoa, edged down 0.03% over the same period. Overall, the IC-Br fell 2.21% in June from May. According to Rafael Rondinelli, an economist at MAG Investimentos, the recent decline reflected a reversal of the price shock caused by the conflict rather than the beginning of a lasting trend. He said the decline followed the ceasefire announced on June 17 and the normalization of shipping through the Strait of Hormuz. Energy prices, he added, will continue to drive volatility in the IC-Br depending on how the conflict evolves. “With the renewed escalation in recent days and the possibility that the temporary agreement could collapse, June’s decline is likely to prove temporary. The geopolitical risk premium is expected to return to energy prices as early as July, putting upward pressure on the index again in the short term,” he said. Bruno Perri, chief economist, strategist and founder of Forum Investimentos, also said the decline is unlikely to last. “What had been keeping prices under control is now unraveling in real time,” he said. Perri added that the repricing of oil represents a supply shock that feeds into inflation expectations. “It narrows the window for interest-rate cuts that the market had begun to anticipate. It’s the opposite of the tailwind we were seeing after the June agreement,” he said. Over the 12 months through June, the IC-Br rose 2.32%. Metal commodities climbed 40.89% over the period, slowing from the 45.82% annual increase recorded in May. Meanwhile, agricultural commodity prices fell 8.11%. Measured in U.S. dollars, the IC-Br rose 1.37% in the second quarter from the previous quarter and was up 10.74% over the past 12 months. Energy commodity prices, however, fell 12.19% in June from May when measured in dollars.