Still some way from the bottom

Commodity prices tumbled this week, echoing moves in other financial markets. Oil was among the worst performers as Saudi Arabia and Russia announced that they will ramp up output from April, after OPEC+ abandoned its efforts to balance the oil market last week. Together with the loss of demand resulting from measures to slow the spread of COVID-19, we expect the oil market to be significantly oversupplied over the next few months. The same is true of industrial metals, though supply cutbacks in China will generally prevent these surpluses from growing too large. On a more positive note, there are now clear signs that China is past the worst of the virus-related disruption. That said, the economic damage in other large commodity consumers such as the US and Europe looks set to grow markedly over the coming weeks. Therefore, we think that the near-term risks to commodity prices remain firmly to the downside. Next week, the focus will remain on further government containment or stimulus measures. We expect the Fed to cut its policy rate by at least 50bps and formally launch another round of QE at its meeting this week. However, this will do little to lift commodity demand while measures to contain the virus remain in place.