Commodity markets tumble on OPEC failure and coronavirus: winners - - PowerPoint PPT Presentation

Commodity markets tumble on OPEC failure and coronavirus: winners and losers in the months ahead

Dan Smith Commodity Market Analytics - Special Adviser to Oxford Economics dsmith@oxfordeconomics.com Stephen Hare Economist share@oxfordeconomics.com March 2020

Oil prices tumble, but there are some brighter spots

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Looking for a floor, as macroeconomic story sours

• New coronavirus hits China in late 2019 resulting in lockdown in many

parts of the country. Car sales fall by 80% y/y in February. Manufacturing PMI drops to lowest level on record at 35.7. Jan/Feb IP data shows a 14% y/y drop.

• Virus quickly spreads to rest of the world resulting in widespread closures
• f schools, shops, factories and severe travel restrictions. European flash

composite PMI shows drop to a record low of 31.4 in March from 51.6 in

• April. US composite PMI falls to 40.9 – worst since 2009.
• Central banks including the US Fed make emergency cuts to interest rates

to avoid a prolonged slump. Stimulus from China and many other countries to underpin growth prospects.

• We are making dramatic downward revisions to our forecasts for global
• GDP. We were forecasting 2.5% growth for this year, but revised down to

0%. Compares to 1% drop in 2009. Strong rebound likely once the virus passes.

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The recovery in China is coming through slowly

Oil demand was weak in early 2020

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Some commodity markets are suffering more than others

• Demand by country. Oil is heavily reliant on the US and so there may be

more challenges to come. Base metals and steel are heavily driven by China and so are better placed in terms of potential for recovery.

• Supply by commodity. Oil is in the middle of a price war between Russia

and Saudi due to the recent breakdown of the OPEC+ agreement, meaning that most countries are maximizing output. Prices will remain low until supply and demand rebalance. Copper and iron ore both have constraints on supply, due to problems in Australia, Brazil and Chile.

• End-use breakdown by commodity. Oil is very reliant on travel, whereas

consumers/companies can delay buying of metal containing goods. Copper and steel will also both benefit from government spending on infrastructure.

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Who are the winners from lower oil prices?

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Other winners from current glut in commodities

• Low commodity prices mean that wealth is redistributed from emerging

markets such as Africa and the Middle East to consumers in Europe, Japan and the US. China and India benefit from lower oil prices.

• Oil consumers should benefit such as airlines, drivers, ships and

petrochemicals, although this is little consolation for now given the weak demand environment and potential for widespread bankruptcies.

• Base metals/steel producers will benefit from cheap energy and raw

material prices, as this is a key input for most miners and smelters.

• Commodity traders act as buyers of last resort when markets are in steep

contango and are locking up excess inventory in cash-and-carry trades in

• il and other commodities.

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Low prices will force oil producers to cut back

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Oil prices should slowly recover

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Forecast outlook and adjustment mechanisms

• Oil is in the worst position in terms of both supply and demand. Low

prices will force many producers into bankruptcy. The US shale industry will be forced to retrench as many producers need prices to be above US$50pb. Consumers are in hibernation due to travel restrictions.

• OPEC+ group is expected to return eventually, but oil market looks set

to move into big oversupply in 2020 and 2021. We currently expect Brent prices to average US$41pb in 2020 and then US$46pb in 2021.

• Copper also looks set to swing into oversupply. Demand is very weak

in Europe and car sales have frozen. Political problems in Chile and a recovery in China should push prices higher by year-end.

• Iron ore and steel – reliance on China and supply challenges keep

markets tight for now.

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China’s HRC price has fallen while iron ore remains firm

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Strong demand from China has driven iron ore prices

EU & US prices have rallied on weak supply

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Ferrous metals price outlook is bleak

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Any questions?

• Dan Smith