Jenna Dagenhart: Hello, and welcome to Asset TV. As people around the world are staying home, the COVID-19 pandemic is having a huge impact on all asset classes, including commodities. OPEC Plus just reached a deal for the biggest oil production cut ever, but the question is: will it be enough to offset offset the dramatic drop in demand ? This is Roland Morris, he's a Portfolio Manager and Strategist for the Commodity Index Strategy team at VanEck. Roland, thanks for being with us.
Roland Morris: Happy to be here.
Jenna Dagenhart: Roland, how are commodities being impacted on the supply and the demand side with coronavirus?
Roland Morris: Well, this has been a historic shock to the whole global economy. At the very beginning of this crisis, there was some concern that there was going to be some supply problems, really because we thought globally that the virus was just striking China. But as it spread across the world and we had to shut down global economies in virtually every country, the demand side really collapsed dramatically.
In fact, it's probably the sharpest demand collapse we've ever seen, in history. So, all commodities all of a sudden, with a lot of other asset classes, declined in response to the demand shock. Some commodities were worse than others—oil in particular—but all commodities fell roughly 20-25% in the first quarter. It was all really related to fears around how long economies are going to be shut down and how severely demand will be impacted.
Jenna Dagenhart: Yeah. Digging deeper into the curve for oil, what are you seeing? Are we seeing contango with the flood of supply? You bring up storage costs.
Roland Morris: When you think about it, we really have had a historic mismatch of demand and supply of anything I've ever seen in commodities. Since we are close to storage, all storage is booked, or essentially tankers are all full. We're coming close to the top of tanks, transportation pipes, everything is booked, so there's no real place to put the oil. If you can find a spot, it's very expensive. We've driven the market into steep contango. The front markets are trading at deep discount to the forward curve.
Really, at its most extreme, which some people refer to as "super contango", about a week ago it was almost a 50% premium one year out, which is a dramatic shift in the curve. In fact, we'd never seen the curve that steep in contango. We saw it briefly in 2008. Sometimes that can actually mark an extreme in a market where prices just get completely disjointed, and the pressure on the front of the curve was so pronounced relative to the back end. I will say that the agreement over the weekend has improved the situation, but only modestly. The curve is still steep in contango. Those front contracts are lower-priced than the forward curve.
Jenna Dagenhart: It takes a little while to get out of that historic contango.
Roland Morris: Really in this situation, we really need to understand how bad demand is, and how quickly it will come back. We're clearly oversupplied, even with the production cuts over the weekend. In the near term, the real question for the market is, how quickly that demand will come back. That's something we're just not going to know for a while.
Jenna Dagenhart: Turning away from oil and looking at gold, which VanEck is known for, how do you view gold in the world of commodities, because it's very different with its role as a safe haven asset, and we're also seeing a very different performance there?
Roland Morris: We have central banks responding aggressively, which at some point might lead to some inflationary pressures, so you have all those question marks out there, and gold has benefited as a flight-to-safety asset. It's obviously performing well. It's making new highs for this move, and most other asset classes around the world are down severely on the year. I will say that it is interesting, we've had a little bit of an issue in between the futures and the spot price. The future's been trading at a pretty steep premium to the spot price of about $45 over the last week. There's a lot of theories as to why that's happening.
Roland Morris: Part of it probably is just the difficulty of actually moving the physical gold to make delivery to the exchange. So, there's a mismatch between the dealers' positions and the futures exchange. We haven't seen that kind of premium in the market in a sustaining way. It has happened in brief periods, but that is something interesting, and I'm not sure anybody's entirely sure why that has happened. But futures have been very strong relative to the spot price. But any rate, gold's acting well.
I will say one other thing about commodities. Broadly speaking, if you look at some other sectors, you are seeing some production being shut down, and over time you'll see production shut down everywhere, including in energy, just because of the price. But we're seeing actually, related to the virus, some shutdowns in other sectors. In gold for instance, about 11% of production is shut in. Now that's not as important to the price of gold because what really matters is investor demand. But if you take an important commodity like copper, almost 30% of current production is shut due to the virus. Those mines, depending on how long they're shut, they will severely impact those commodities.
We may end up with a situation where, when we come out of this, we actually get some pretty strong price movement in commodities because we will have destroyed some supply. When demand comes back, particularly in some of the industrial metals, we're likely to be short on supply, and copper would be one that I would highlight. So, the virus is having an effect on both sides. Clearly now we're more worried about demand. But as we go forward with some of these mines being shut for health concerns, you're going to have concerns about actual supply, so there's two sides to the forces here.
Jenna Dagenhart: Yeah, really interesting point, Roland, and definitely something to keep in mind. Well, thanks so much for your time.
Roland Morris: Thank you for having me.
Jenna Dagenhart: Thank you for watching. That was Roland Morris. He's Portfolio Manager and Strategist for the Commodity Index Strategy team at VanEck, and I'm Jenna Dagenhart with Asset TV.
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