GOLDMAN SACHS: Commodities markets face biggest demand shock since financial crisis

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Reuters

  • Coronavirus-fueled plant closures in China have disrupted commodity markets the most since the 2008 financial crisis, Jeff Currie, head of global commodities research at Goldman Sachs, wrote in a Friday memo.
  • The pause in major manufacturing efforts has reduced demand for oil by 4 million barrels per day, Currie wrote, adding that the demand affected in 2008 has reached 5 million barrels per day.
  • “In-stock” commodities such as aluminum and steel may have their demand postponed until production returns to full capacity, but demand for “flow” products like petroleum will be lost. of the economic chaos of the epidemic, he wrote.
  • Gold is the only commodity “immune to the virus,” Currie said. The precious metal has outperformed the safe haven currencies and will continue to do so until the virus is contained, according to Goldman.
  • Watch commodity trading live here.

The coronavirus’ grip on Chinese manufacturing efforts is disrupting commodity markets at levels not seen since the 2008 financial crisis, Goldman Sachs wrote in a Friday memo.

The infection rate from the epidemic in China has only recently started to slow after authorities instituted strict containment measures. After weeks of forced quarantines and factory closures, the country’s critical and complex manufacturing sector is restarting. Goods are produced, shipping companies leave the country, and supply chains receive key components after weeks of delay.

The resumption of the backbone of global manufacturing marks the end of a dark era for some companies, but presents a new challenge for others. The “unprecedented disruption of economic activity” has reduced demand for oil by about 4 million barrels a day, wrote Jeff Currie, head of global commodities research at the bank, adding that the shock of the demand observed during the Great Recession reached 5 million barrels per day. Demand for oil could fall further in the coming weeks if new epidemics in Europe and Asia introduce additional travel bans.

Currie also pointed out that China’s oil storage capacity is a variable under pressure. Stores nationwide “are filling up quickly, posing further downside risk if storage is ultimately breached,” the chief commodities said. The problem is unique to petroleum and other liquid commodities, as stocks of solid goods can be more easily managed.

The bank classified the commodity disruption as either being consumed as a stock or as a flow. The first involves materials such as steel or aluminum used in the creation of goods or infrastructure. Raw materials consumed in flux include oil in transportation or coal in power generation, Currie wrote. The demand for “in-stock” products is not as severe, as materials used in the production of goods may be deferred until the end of production stoppages, he added. The need for “flow” products will not recover so easily, as usage will simply revert to previous levels and cannot be increased to compensate for losses.

Amid the chaos in the commodities market, Currie identified gold as “immune” to coronavirus volatility. The traditional safe haven has seen steady gains as investors fled the plunge in stocks, despite the precious metal’s price falling from its highs in late February. Gold is “the currency of last resort” and is not subject to the price fluctuations seen by currencies exposed to virus risk, Currie wrote.

“As a result, gold has outperformed other safe-haven assets like the Japanese yen or the Swiss franc, a trend we see continuing as long as uncertainty about the full impact of COVID-19 remains,” the official wrote. raw material.

The coronavirus and the related COVID-19 disease are responsible for more than 3,000 deaths and more than 89,000 infections as of Monday afternoon. The outbreak originated in Wuhan, China, and has since spread to at least 69 other countries. Analysts see rising infection rates in Iran, Italy and South Korea as potential risks of slowing global growth.

Gold was trading at $ 1,596.60 an ounce at 2:50 p.m. ET on Monday, up 4.7% year-to-date. WTI crude was trading at $ 46.60 a barrel, down 27.4% year-to-date.

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