The effects of the oil race to the bottom on the rest of the commodity market

The effects of the oil race to the bottom on the rest of the commodity market

24 April 2020 from Anna Svahn

When no investor wanted to take physical delivery of oil, among other things as a result of already overcrowded storages, which would make the storage cost too high in relation to what one could then sell the same raw material for the WTI May contract fell to below USD 0 per barrel . But what exactly does oil price deflation mean for other commodities? Will they also be included in the case?

Raoul Pal, investor and CEO of Real Vision, recently wrote about how the oil price collapse will bring agricultural raw materials such as sugar, corn and soybeans. At first glance his analysis can be interpreted as that a scaffold in oil can be directly translated into a scaffold in other raw materials. But if you take a closer look at each commodity, you understand that the oil price collapse will not affect agricultural commodities as a group.

Between 2000-2010, biofuel production increased five-fold, which was a contributing factor to the price of agricultural raw materials such as corn and sugar rising from previously low levels. However, the oil price collapse now has negative effects on the agricultural commodities whose demand has risen due to increased biofuel production. Raoul Pal expects that the price of sugar used in ethanol production can fall as low as $ 4, levels we haven't seen since the end of the last millennium. From today's levels it would mean that the price of sugar would fall above 60%.

Source: CME Note: Past performance is not a reliable indicator of future results.

The effects on corn are also high as a result of the oil crisis and Covid-19. In addition to the production of ethanol, corn demand is largely controlled by global meat production. In the surge waves of the corona virus, analysts are concerned that global meat production will decline significantly, which together with reduced ethanol demand will have negative consequences for the price of corn.

Source: CME Note: Past performance is not a reliable indicator of future results.

A third agricultural commodity that has been in the spotlight in recent years is soybeans. American soybean farmers have had a tough time in recent years due to the trade war between China and the United States and swine flu in China, which has caused demand for soybeans to more than halved from the world's largest importer of the raw material. The price of soybeans is not reduced by the oil per se, but is affected even more by reduced global meat production and continued large stocks.

Source: CME Note: Past performance is not a reliable indicator of future results.

However, it is important to distinguish which raw materials are adversely affected by which factors. Yes, corn and sugar will be cut down by low energy prices, but for other soft raw materials the effects of Covid-19 may even be positive. Raw materials are, just like gold, a hedge against inflation and with the banknote press on high-speed it may be interesting to look at coffee, for example, that has been pulled down by the Brazilian Real, which has now strengthened slightly against the US dollar.

 @Anna Svahn


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07/12/2022 10:22:47


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