Rapid Reset

Though there has already been a seismic shift in broader risk sentiment across all asset classes, within the commodities market, we may see additional risk re-evaluation. In general, there has been a supply glut across the board for many years, which has depressed price levels. While the primary focus since the start of the COVID-19 pandemic has been on the scale and longevity of demand destruction, supply disruptions will increasingly become a factor in price discovery. Companies involved in the production of commodities are pulling back in response to government-enforced shutdowns and collapsing prices. This is most apparent in the U.S. energy space, where cutbacks in new projects will start to affect oil supply by the end of 2020. The S&P GSCI Petroleum is down a staggering 58.3% YTD, reflecting these depressed price levels, and it is not yet pricing in a supply shortfall. Forced shutdowns are not only affecting the energy sector but metals and mining companies as well. While current stockpiles may meet immediate demand in the short run, once global supply chains start moving again, there will likely be a short- to medium-term drag on supply while firms in many commodities markets restart their operations.

Are we finally at a moment of peak commodities supply? It is impossible to say for certain in the face of an unpredictable pandemic and unprecedented monetary and fiscal stimulus. However, global commodities supply has and will likely continue to fall in the near term, and as levels of economic activity start to pick up, supply will play an increasingly important role in the price discovery process.

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