The Currencies Hit Hardest By Coronavirus

1. These currencies have plunged the most

- The pandemic has hit China, Iran, Western Europe and the U.S. the hardest. But falling oil prices and global economic stress has led to capital flowing out of emerging markets in a flight to safety.

- The currencies in Russia, Mexico and Colombia have all fallen 20 percent since the start of the year.

- The six oil-producing members of the Gulf Cooperation Council – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE – all have currency pegs that they need to defend, which means that while their currencies remain unchanged, the crash in crude prices will bleed them of foreign exchange. The GCC fiscal deficit will rise to 14 percent of GDP with oil prices at $30 per barrel, according to Bloomberg.

- Nigeria’s currency peg is one of the most unsustainable. Foreign exchange has declined by 20 percent since last summer to $36 billion, according to Bloomberg.

2. Big Oil’s dividends on borrowed time

- As share prices for the oil majors plunge, their dividend yields have spiked. All of the five majors – ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), BP (NYSE: BP), Royal Dutch Shell (NYSE: RDS.A) and Total (NYSE: TOT) have yields above 10 percent. Shell’s yield is approaching 15 percent, for example.

- “Nobody wants to be the CEO who cuts the dividend,” Noah Barrett, a Denver-based energy analyst at Janus Henderson Group Plc, told Bloomberg. “They understand that any company that cuts, its shareholders will flow into competitors and be very, very hesitant to ever come back.”

- ExxonMobil saw its credit rating cut this week by S&P.

- Share buyback programs may be the first expense to be scrapped.

- “They’re going to have to lean on the balance sheet,” Barrett said. “At some point though, borrowing to pay the dividend is not sustainable.”

3. World may run out of oil storage

- Total available crude oil storage capacity around the world likely sits at around 900 million barrels, “split between floating tank (660mn bbl), SPR (150mn bbl), and other cavern and fixed tank (90mn bbl),” Bank of America Merrill Lynch said in a note.

- A steep contango in the futures curve is also incentivizing floating storage.

- “In our base case, we expect inventories to rise by 4mn b/d, or 364mn bbl in 2Q,” Bank of America said.

- “In a severe case, the market could build inventories at a rate of 10mn b/d, boosting crude and product stocks by more than 900mn bbl next quarter,” the bank warned.

- Of course, the market will price in dwindling storage, which means crude may drop into the teens “in order to shut in production,” the bank concluded.

4. Storing oil at sea

- The sudden historic glut of oil has led to a mad dash for storage. Saudi Arabia is also booking ships as it plans to flood the global market with crude.

- That has led to a spike in the cost of booking a tanker. “Earnings for supertankers on the benchmark voyage from the Middle East to China last week jumped by 700% to $243,347 a day, according to data from the Baltic Exchange,” Bloomberg noted.

- Brent contracts for delivery in May 2021 are now trading $14 per barrel higher than for May 2020, or $28 million for storage on a supertanker for a year. A trader can sell cargoes for next year, buy oil today and pay for storage.

- But that’s exactly why day rates for tankers are spiking right now.

5. Copper slammed by pandemic

- Copper prices have plunged, along with every other commodity. Prices have fallen below $5,000 for the first time since late 2016.

- “Announcements of extensive stimulus measures to combat the coronavirus crisis are falling on deaf ears, apparently because fears of a deep and far-reaching recession are simply too acute,” Commerzbank wrote in a note.

- Stimulus will do very little for consumer or industrial demand if everyone is in isolation.

- “Meanwhile, more and more mining companies are temporarily reducing or completely suspending their production,” Commerzbank added. “The construction of new mines and the expansion of existing ones is also having to be interrupted due to the quarantine measures being taken in numerous countries.”

- The cutbacks may help head off a major surplus. Copper stocks are near all-time highs.

6. Today’s bust sets up tomorrow’s boom

- The decision by Saudi Arabia and Russia to abandon market management has kicked off a price war, and a fight for market share in an oversupplied world.

- U.S. shale could lose 0.75 mb/d year-on-year by December, according to Goldman Sachs, with losses continuing into next year.

- But at some point, the pandemic will pass, leading to a rebound in demand. At the same time, the loss of high-cost shale could tighten up the market.

- “[I]f low-cost producers hold the line in their market-share recapture, we expect the global oil cost curve will become steeper and curtailed, setting the stage for a structural shift higher in oil prices as new investment becomes required,” Goldman analysts said.

- However, the investment bank declined to offer a timeline, citing the uncertainty of the duration of the pandemic, plus uncertainty on the return of disrupted output in Libya, Venezuela and Iran.

7. Palladium prices fall in half

- Palladium – the best performing commodity in 2019 – has seen prices fall in half since the end of February. Palladium is now trading at its smallest premium to gold since September 2019.

- The selloff has occurred despite the outage at a critical Anglo American (LON: AAL) plant, which accounts for 4 percent of global palladium supply.

- Meanwhile, some substitution could hit palladium consumption. “BASF has announced that it has started substituting platinum for palladium in gasoline auto-catalysts,” Standard Chartered wrote in a note. However, that too probably isn’t the largest factor in the analysis.

- Concerns about demand and the pandemic are paramount, the bank said.