Commodity wrap: Oil, gold, silver, CO2 emissions (18.03.20)

Oil:

• WTI oil drops to around USD 25 per barrel
• At this price most American shale is unprofitable
• Spread between WTI and Brent crude oil may fall to zero and even be positive on the WTI side due to trade war
• Russia is definitely more resistant to low prices than other oil-dependent economies
• The annual decline in demand may be greater than 3 million barrels per day taking into account the further expansion of the epidemic (3 million barrels per day of decline with a global GDP decline of 0.4 percentage point)

Russia can withstand low oil prices longer. Source: IMF, S&P

During the 2008 crisis, we observed a temporary advantage of WTI over Brent at 14 USD per barrel! Source: Bloomberg

Are we going to find an analogy from the previous price war? After a 62% drop, we should expect a 50% rebound, which should move the price to 37.50 from current levels. Source: xStation5

Gold:

• Gold falls below 1500 USD per ounce in connection with the investors' cash rally

• Financial conditions according to the Bloomberg index are the worst since the crisis started, although they are not at their lows yet
   

• A clear reduction in long positioning on gold, but at the same time a reduction in short positions which means that speculators are withdrawing from the futures contract market

• 2008 may be an indicator for the current situation, although back then the price fell by 30% throughout the year!

• The rebound occurred when the Fed announced the QE1 program. This time the Fed presents the QE4 program much earlier together with strong interest rate cuts

• A response from demand for cheap money will mark another upward wave on the gold market

The behavior of gold prices and ETFs based on gold in 2008 was very similar to the current situation. With faster response from the demand, losses may be limited, although in 2008 they even reached 30%. Source: Bloomberg, XTB

Positioning shows clear withdrawal of buyers (data for March 10!). A similar situation took place in 2016, when the buyers totally gave up and the price fell by 15%. Source: Bloomberg

Silver:

• The price has fallen almost 40% from the peak of the beginning of the month

• Complete collapse of precious metals with a large share of industrial demand

• The current situation, similar to the gold market, resembles that of 2008. At that time however, the decline from the local peak was 56%, which means that now the price may fall to around USD 8 per ounce

• A clear reduction in long positioning. Further declines could be supported by a retreat from the ETFs. At the moment, however, the funds do not decide to sell their silver.

The price of silver is sinking, but ETFs are not selling their bars at the same rate. Source: Bloomberg, XTB

Silver could fall to around USD 8 per ounce, taking into account similar behavior as in 2008. It is worth remembering, that the current activities of central banks aimed at "decreasing the value of money" are definitely more intensified and faster than over 10 years ago. Source: xStation5

CO2 emission permits(EMISS)

• Nearly 40% decline this month
• The lowest price since November 2018
• Further important technical levels are 8.70 and 4.00 for the emission of one ton
• From the 2008 peak to the bottom in 2009, the price fell by over 70% - this would imply a fall to around 8.00 given the last local peak which occured before the recession in the markets
• In 2019, the price remained in consolidation after a 70% decrease
• An outbreak of coronavirus has resulted in the closure of many companies around the world. In Europe, such companies as Renault, Volkswagen and Daimler have recently announced the suspension of production. All this means a significant reduction in CO2 emissions into the atmosphere, in particular caused by lower heat demand.

In 2008, the price fell by 70%, after which it remained in consolidation. Source: Bloomberg

Despite the huge decline, this may not be the end of the bear market in emissions, especially considering what happened in 2008. Source: xStation5