GOLDMAN SACHS: Commodities markets are facing their biggest demand shock since the financial crisis

• The coronavirus-fueled factory shutdowns in China are disrupting commodities markets the most since the 2008 financial crisis, Jeff Currie, head of global commodities research at Goldman Sachs, wrote in a Friday note.
• The pause to major manufacturing efforts shrank oil demand by 4 million barrels per day, Currie wrote, adding that the demand hit in 2008 reached 5 million barrels per day.
• "Stock" commodities such as aluminum and steel can see their demand deferred until production returns to full capacity, but demand for "flow" commodities like oil will be lost to the outbreak's economic chaos, he wrote.
• Gold serves as the single commodity "immune to the virus," Currie said. The precious metal has outperformed safe-haven currencies and will continue to do so until the virus is contained, according to Goldman.
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Coronavirus' grip on Chinese manufacturing efforts is disturbing commodities markets at levels not seen since the 2008 financial crisis, Goldman Sachs wrote in a Friday note.

The outbreak's infection rate in China has only recently started to slow after authorities instituted strict containment measures. After weeks of forced quarantines and factory shutdowns, the country's critical and complex manufacturing sector is restarting. Goods are being produced, shipping ventures are leaving the country, and supply chains are receiving key components after weeks of delays.

The resumption of the world's manufacturing backbone marks the end of a dark era for some firms but kicks off a new challenge for others. The "unprecedented disruption to economic activity" shrank oil demand by roughly 4 million barrels per day, Jeff Currie, head of global commodities research at the bank, wrote, adding that the demand shock seen during the Great Recession reached 5 million barrels per day. Demand for oil could drop further in the coming weeks if new outbreaks in Europe and Asia introduce additional travel bans.

Currie also pointed to China's oil storage capacity as a variable under pressure. The country's stores are "filling up quickly, presenting further downside risk if storage is ultimately breached," the commodities chief said. The issue is unique to oil and other liquid commodities, as inventory of solid goods can be more easily accommodated.

The bank categorized the commodities disruption as either being consumed as a stock or as a flow. The former involves materials such as steel or aluminum used in creating goods or infrastructure. Commodities consumed as a flow include oil in transportation or coal in energy production, Currie wrote. Demand for "stock" commodities isn't as severe, as materials used in the production of goods can be deferred until manufacturing shutdowns end, he added. The need for "flow" commodities won't recover so easily, as usage will simply return to previous levels and cannot be boosted to make up for losses.

Amid the commodity market chaos, Currie identified gold as "immune" to coronavirus volatility. The traditional safe haven has enjoyed a steady run-up as investors fled from falling stocks, though the precious metal's price has fallen from its late-February highs. Gold is "the currency of last resort" and doesn't suffer the price swings seen by currencies with exposure to virus risks, Currie wrote.

"As a result, gold has outperformed other safe-haven assets like the Japanese Yen or Swiss Franc, a trend we see continuing as long as uncertainty around the full impact of COVID-19 remains," the commodities head wrote.

The coronavirus and related COVID-19 disease are responsible for more than 3,000 deaths and more than 89,000 infections as of Monday afternoon. The outbreak originated in Wuhan, China, and has since spread to at least 69 other countries. Analysts are eyeing rising infection rates in Iran, Italy, and South Korea as potential risks for slowing global growth.

Gold traded at $1,596.60 per ounce as of 2:50 p.m. ET Monday, up 4.7% year-to-date. WTI crude traded at $46.60 per barrel, down 27.4% year-to-date.

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