Why does the coronavirus outbreak in China continue to have an outsized impact on commodities like oil and copper? And will the rise in gold prices revert once the virus is contained? Kim Parlee speaks with Bart Melek, Global Head of Commodity Strategy, TD Securities.
- Welcome to the show. It is great to have you with us. If we just look at what's happened to the equity markets this week, you might think that we are in a roaring bull market. But not everything has been in on the action. Commodities are still suffering from fears that the coronavirus will hurt global growth.
I talked to Bart Melek. He's global head of commodity strategy at TD Securities. And I asked him about the impact the outbreak has had on oil.
- The coronavirus outbreak has essentially prompted the market to believe that there will be a significant impact of this slowdown on demand, as much as 300,000 to 500,000 barrels a day globally, not only in China. And that means that the already significant oversupply will likely get bigger.
We're not seeing the rebound because there is too much of it at this point. And oil has trended lower, even though Libyan production is pretty much out of the picture. And that could be as much as 1 million barrels, 800,000 barrels a day. Market has not responded. And demand worries are the big issue driving oil right now.
- Copper has been another casualty of the virus fear. If you take a look at this chart, you can see it has taken quite a hit. Could this be a buying opportunity? Here's what Bart had to say about copper.
- Copper dropped for the same reason as oil dropped. Market, again, was worried that slower economic growth globally because of the virus outbreak may very well reduce demand significantly and cause a surplus. We don't think that is the case. So, as a result, we've added a long copper position to our model portfolio.
The reason we believe copper rebounds longer term is because the supply demand fundamentals, even in a pretty weak demand scenario, imply an equilibrium price about $6,300, $6,400 a ton. There isn't an oversupply like we're seeing in oil. And we ultimately think that, once the shock and panic dissipates, markets will again start pricing copper as though it is fairly tight.
- Gold is the one commodity that's had a lift since the coronavirus outbreak. So while gold prices continue to hold up, I asked Bart about his outlook on gold.
- Gold has rallied as risk assets like copper and equities have fallen in response to the coronavirus fears. Reason here is the market believe that we could see a significant correction in equity markets on a prolonged basis. We could see significantly lower interest rates and more liquidity being added by central banks around the world. In fact, China is already adding to liquidity to try to mitigate some of the negative results that we've seen because of the outbreak.
We like gold, and we think gold performs well ultimately. There will be lower interest rates for longer. That means real interest rates will be low, representing low opportunity cost to hold these zero yielding assets like gold. So for the next six months or so, we like gold, and we think that the peak level will be about $1,700 or so. But that's in the second half.
- Great insight from Bart Melek at TD Securities.