Chart the Day 16 April 2020
Only a few days ago, Russia and the OPEC countries – with US support – agreed to an historic 10million barrels per day (mbpd) cut in oil production. It signalled the end to the oil price war Saudi Arabia unexpectedly launched in early March. Oil prices rallied in anticipation of the deal, but have pulled back since to hover around 18-year lows. The impact of collapsing oil demand is simply overwhelming. The International Energy Agency expects a 29mbpd slump in demand in April, and a 9.3mbpd decline in 2020 as a whole. It noted that there is “no feasible agreement that could cut supply by enough to offset such near-term demand losses.”
On the other hand, after initially selling off, gold is now soaring. The mad scramble for cash in March led to forced selling of gold, despite its perceived safe-haven status. However, with markets having calmed down and interest rates at rock bottom, the backdrop for gold has improved substantially. (Since gold pays no interest, the opportunity cost of holding it falls with real interest rates). Some are even talking about the return of inflation given the trillions of dollars being thrown at the Covid-19 problem from fiscal and monetary authorities (unlikely, but we’ll see).
For South Africans, this divergence in prices is good news since we import oil and export gold. Even with a weak rand, the petrol price is set to decline by around R1.80 per litre next month according to the Central Energy Fund. The bad news? Gold production has fallen by three-quarters over past 20 years. Also, lower fuel prices don’t help much if no one can drive around.
