Plunging oil prices ultimately grease a commodity countries wheels

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Lower oil and fuel prices ultimately boost disposable incomes and food demand

In a year of unprecedented events, this week commodity markets added another to the list. West Texas Intermediate (WTI) oil prices traded in negative territory on Tuesday for the first time ever.

Already reeling from plunging prices over 2020, WTI oil prices traded as low as -$US40/barrel at one stage. The fall over 2020 owes to the COVID-19-induced collapse in global demand, while major producers also failed to agree on supply cuts quickly enough to stem the tide. And while OPEC has now agreed to supply cuts, they have yet to kick in.

The resulting temporary squeeze on almost full global storage has seen the plunge this week into negative territory. For example, the main US storage hub has gone from 50% full to 79% in just four weeks.

For South American countries, the impact is mixed. Venezuela and Brazil being large oil producers will suffer but in our view, we anticipate the net impact of plunging oil prices ultimately will prove positive for commodity prices in most South American countries that rely on agricultural exports.

Indeed, we expect that lower oil and thus fuel prices will boost consumers’disposable incomes in the key markets and in turn lead to higher food demand. Moreover, the regions key export markets, notably China, are net oil importers.

On the flip side, we anticipate lower oil prices may hurt food demand in some markets, but not enough to offset the increased demand outlined above. For example, lower Middle East incomes may lead to falling demand, although we continue to note that households are still likely to be prioritising food over luxuries for example.

Meanwhile, from a supply perspective, lower energy costs reduce the competitiveness of the US ethanol industry. As the ethanol industry competes for grain with the US farming industry, this is likely to see lower feed costs for bio fuel farmers.

Turning back to commodity prices, we do acknowledge that there may be short-term contagion or a confidence impact on commodity prices. For example, overall dairy auction prices fell 4% this week.

Ultimately, though we expect demand fundamentals to dominate and as consumers, disposable incomes improve so should food demand and thus commodity) prices.

Source: ASB

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