Virus is prompting a rethink of forecasts - Capital Economics
Commodities Overview

Virus is prompting a rethink of forecasts

Commodities Weekly Wrap
Written by Caroline Bain
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The prices of almost all commodities plunged this week amid fears that the coronavirus is morphing into a pandemic, with negative implications for global economic activity and commodities demand. Prior to the virus outbreak, we had expected a gradual pick-up in global growth to support most commodities prices. This week, we revised our metals forecasts to reflect our more bearish view on the outlook for China. In the next few weeks, as the global impact becomes clearer, we expect to revise our energy and precious metals forecasts.There could be some respite for oil prices if OPEC+ decides to deepen output cuts at the meetings scheduled for 5th-6th March. The chances of further output cuts have increased in the last week or so as the virus has spread rapidly outside China. That said, given the scale of risk aversion in financial markets, any OPEC+ action is more likely to stem further falls in oil prices rather than give them a lift. On the data front, China’s February PMIs (to be published this weekend) will give us some indication of the scale of the economic slowdown. But it may be that PMI data from elsewhere in Asia and from advanced countries will be watched more closely for signs that China’s woes were leading to disruption elsewhere.

  • The prices of almost all commodities plunged this week amid fears that the coronavirus is morphing into a pandemic, with negative implications for global economic activity and commodities demand. Prior to the virus outbreak, we had expected a gradual pick-up in global growth to support most commodities prices. This week, we revised our metals forecasts to reflect our more bearish view on the outlook for China. In the next few weeks, as the global impact becomes clearer, we expect to revise our energy and precious metals forecasts.
  • There could be some respite for oil prices if OPEC+ decides to deepen output cuts at the meetings scheduled for 5th-6th March. The chances of further output cuts have increased in the last week or so as the virus has spread rapidly outside China. That said, given the scale of risk aversion in financial markets, any OPEC+ action is more likely to stem further falls in oil prices rather than give them a lift.
  • On the data front, China’s February PMIs (to be published this weekend) will give us some indication of the scale of the economic slowdown. But it may be that PMI data from elsewhere in Asia and from advanced countries will be watched more closely for signs that China’s woes were leading to disruption elsewhere.

Chart 1: S&P GSCI by Category (1st Jan. 2020 = 100)
(Latest = 27th Feb.)

Chart 2: Selected Price Moves in the Last Week
(21st Feb. – 28th Feb.) (%)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Bloomberg, Capital Economics

Energy & Industrial Metals (Page 2)

Precious Metals & Agriculturals (Page 3)

Short-Term Price Charts & Forecasts (Page 4)

Selected Recent Publications (Page 5)


Energy

  • Oil prices plummeted this week as a surge in COVID-19 cases outside of China weighed heavily on investor sentiment and caused a broad sell-off in risky assets (3). Prices were also dampened by concerns about the growing loss in China’s crude demand, where economic activity is struggling to return to normal even after virus containment measures were relaxed. We no longer expect Chinese economic growth and oil consumption to fully recover their losses from the first quarter. (See here.)
  • Therefore, we now think that the oil market will remain in a surplus in the second quarter (4). Implicit in our new market balance forecast is the assumption that Libya’s output will remain offline during the second quarter and that OPEC+ will maintain output constraint until the end of 2020. That said, the latest slump in oil prices may convince the group to deepen its output cuts at its meeting next week. We will be reviewing our oil price forecasts after the meeting.

Chart 3: Crude Oil Price & US Equities

Chart 4: Oil Market Balance (Mn. BpD)

Source: Refinitiv

Sources: IEA, Capital Economics


Industrial Metals

  • It was another dreadful week for industrial metals prices. The S&P GSCI Industrial Metals index is now around 10% below its January peak, and is approaching lows last seen during fears of a “hard landing” in China (5). The ongoing economic dislocation has led our China team to revise down its forecast for GDP growth in 2020. As a result, while we expect stimulus rolled out once the virus is contained to support iron ore and Chinese steel prices, we have lowered our year-end forecasts for most base metals. (See here.)
  • Our forecasts remain consistent with a rise in base metal prices by year-end. But we wouldn’t rule out prices falling further in the near term. In fact, if the virus continues to spread rapidly outside of China, there is a good chance that we will need to revisit our forecasts again. However, the fact that the copper-to-gold price ratio is already at its lowest level since the global financial crisis suggests that a very large demand shock is already priced in (6).

Chart 5: S&P GSCI Industrial Metals Index

Chart 6: Copper/Gold Price Ratio

Source: Refinitiv

Sources: Refinitiv, Capital Economics


Precious Metals

  • Most precious metals prices trended down this week. Gold fell by 3%, even as the CBOE Volatility Index (or ‘fear index’) jumped to 40 on Thursday – its highest level in two years. Investors were seemingly keen to raise money by selling gold in order to cover their margins amid falling equity prices. For their part, ETF holdings were flat on the week (7). Looking ahead, fears of a global pandemic have raised investor expectations of central bank rate cuts, which could provide support to precious metals prices.
  • Meanwhile, palladium’s recent rally hit the skids, with the price down 3% week-on-week. Palladium reached an intra-day high of $2,875 per ounce on Thursday, only to fall by over $200 on Friday. Earlier in the week, representatives from Russian mining giant Norilsk Nickel suggested that that COVID-19 will disrupt near-term palladium supply, which should support elevated prices for the rest of 2020. Despite Friday’s falls, palladium’s steep price premium to platinum (8) is unlikely to come undone anytime soon.

Chart 7: Gold ETF Holdings & Price (2020)

Chart 8: Palladium – Platinum Price Differential (US$)

Source: Bloomberg

Sources: Refinitiv, Capital Economics


Agriculturals

  • The prices of agriculturals tumbled across the board this week as the coronavirus outbreak continued to weigh on investor sentiment. In particular, the price of cotton plunged to a four-month low (9) amidst fears of lower Chinese demand. If textile production continues to slow across Asia due to disruption associated with the virus, demand would weaken further in the short term. However, our central forecast remains that prices will rebound once the virus is contained.
  • The price of sugar also fell sharply (10), owing in part to falling oil prices, which weighed on ethanol output. The ongoing slide in the Brazilian real (Brazil is the world’s largest exporter) is an additional factor pushing prices lower. Furthermore, the Brazilian real continued to depreciate, increasing downward price pressures as Brazil is the world’s largest sugar exporter. Providing the virus eases, we expect prices to recover to 14.5 US cents per pound by the end of this year as the market moves into a small deficit.

Chart 9: Cotton Prices (US Cents per lb)

Chart 8: Sugar & Crude Oil Prices

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics


Short-Term Price Charts & Forecasts

Chart 11: Energy

Chart 12: Industrial Metals (US$ per Tonne)

Chart 13: Precious Metals (US$ per Ounce)

Chart 14: Agriculturals (US Cents per Bushel)

Source: Refinitiv

Key Commodity Price Forecasts

Actual

Forecasts (End-period)

1mth ago

1 week ago

Latest

2020

2021

28th Jan.

21st Feb.

28th Feb.*

Q1

Q2

Q3

Q4

Q1

Q2

Energy

Crude Oil (Brent, US$ per barrel)

60

59

51

62

65

70

75

75

76

US Natural Gas (US$ per mBtu)

1.93

1.91

1.71

2.00

1.90

2.40

2.70

2.50

2.60

Coal (Newcastle, US$ per tonne)

68

68

68

69

65

63

60

58

57

Industrials (US$ per tonne)

Copper

5,675

5,746

5,572

5,600

5,800

6,000

6,200

6,400

6,400

Aluminium

1,738

1,689

1,663

1,700

1,750

1,750

1,800

1,825

1,850

Iron Ore

96

92

87

90

90

90

90

85

80

Precious Metals (US$ per ounce)

Gold

1,566

1,643

1,628

1,500

1,450

1,450

1,400

1,400

1,375

Silver

17.43

18.46

17.10

17.00

17.00

16.00

16.00

15.50

15.00

Platinum

986

973

868

850

850

800

800

800

800

Agriculturals (US cents per bushel)

Corn

387

377

366

380

390

400

410

413

415

Soybeans

895

891

881

880

885

890

900

910

925

Wheat

570

551

526

525

490

470

450

452

454

Sources: Refinitiv, Bloomberg, Capital Economics *Iron Ore latest price is 27th Feb


Selected Recent Publications

Date

Publication

Title

Mon 13th Jan.

Commodities Update

Our key calls for the agriculturals in 2020

Tue 14th

Commodities Update

China’s commodity imports end 2019 on a high

Precious Metals Update

Gold set to lose Midas touch

Wed 15th

Commodities Update

Wheat prices to plummet by 20% in 2020

OPEC Watch

OPEC Monthly Oil Market Report (Jan.)

Energy Data Response

US Weekly Petroleum Status Report

Thu 16th

Commodities Update

Phase One deal no bonanza for commodities

Mon 20th

Metals Data Response

Global Aluminium Production (Dec.)

Thu 23rd

Energy Data Response

US Weekly Petroleum Status Report

Fri 24th

Energy Watch

No respite for European coal prices

Metals Focus

What ‘Japanification’ means for steel

Mon 27th

Metals Data Response

Global Steel Production (Dec.)

Commodities Outlook

Cautiously optimistic

Wed 29th

Energy Data Response

US Weekly Petroleum Status Report

Commodities Update

Is the coronavirus-led collapse in oil prices justified?

Precious Metals Update

Palladium dancing to its own tune

Thu 30th

Energy Outlook

Oil to outperform

Fri 31st

Industrial Metals Update

Coronavirus could push copper market into surplus

Mon 3rd Feb.

Commodities Update

China’s PMIs already old news

Tues 4th

Commodities Chart Book

Virus fears to drive prices for some time yet

Precious Metals Update

Turnaround in global growth to hit gold demand

Wed 5th

Metals Outlook

Recovery still base case, but coronavirus big risk

Energy Chart Book

Coronavirus to keep prices low in Q1

Energy Data Response

US Weekly Petroleum Status Report

Thurs 6th

Metals Chart Book

Hoping for some better times ahead

Fri 7th

Energy Watch

Middle East oil supply shocks and the risk premium

Tue 11th

Energy Update

The oil market to flip into a deficit after Q1

Precious Metals Update

China’s December gold imports a flash in the pan

Wed 12th

OPEC Watch

OPEC Monthly Oil Market Report (Feb.)

Energy Data Response

US Weekly Petroleum Status Report

Thu 13th

Energy Update

LNG prices to remain in the doldrums

Industrial Metals Update

Supply cutbacks in China look increasingly likely

Mon 17th

Commodities Update

Don’t read too much into the collapse in the BDI

Tue 18th

Commodities Update

Strong dollar not necessarily a major headwind

Industrial Metals Update

Perception the key to cobalt’s future

Wed 19th

Precious Metals Update

Silver to outperform gold in 2020

Thu 20th

Energy Data Response

US Weekly Petroleum Status Report

Metals Data Response

Global Aluminium Production (Jan.)

Precious Metals Update

Higher truck loadings no panacea for platinum

Fri 21st

Energy Update

Henry Hub to outperform amid COVID-19 outbreak

Tue 25th

Metals Dara Response

Global Steel Production (Jan.)

Wed 26th

Energy Data Response

US Weekly Petroleum Status Report

Thu 27th

Industrial Metals Update

Revising our forecasts as COVID-19 effects linger

Fri 28th

Energy Update

A Democrat could spark higher oil prices

For copies of any of these reports, please call +44 20 7823 5000 or e-mail sales@capitaleconomics.com


Caroline Bain, Chief Commodities Economist, +44 20 7808 4055, caroline.bain@capitaleconomics.com
Alexander Kozul-Wright, Commodities Economist, +44 20 3927 9833, alexander.kozul-wright@capitaleconomics.com
Samuel Burman, Assistant Commodities Economist, +44 20 7811 3911, samuel.burman@capitaleconomics.com
Kieran Clancy, Assistant Commodities Economist, +44 20 3974 7422, kieran.clancy@capitaleconomics.com
Franziska Palmas, Assistant Economist, +44 20 7811 3914, franziska.palmas@capitaleconomics.com
William Ellis, Research Assistant, +44 20 7808 4068, william.ellis@capitaleconomics.com