Commodity prices back in focus for EM Investors – Goldman Sachs

Mark Ozerov, Research Analyst at Goldman Sachs, points out that oil prices have fallen by around 10% between mid-April and now – culminating in a sharp move last Thursday and against this backdrop, EM FX has been fairly stable against the dollar on aggregate, with underperformance of commodity exporters (RUB, COP, MXN) under the hood.

Key Quotes

“This was distinct from the March oil sell-off, when, perhaps paradoxically, oil currencies outperformed the broad EM. Going forward, we expect continued inventory draws to push the curve into backwardation, and ultimately lead to a sequential recovery in oil prices. Yet, a supply-driven fall in longer term prices creates some downside risks to our forecasts. In such a context, an important question for investors is at what point the oil price sell-off (if continued) becomes a significant issue for a broader range of EM assets, rather than localised in the parts of EM directly exposed to commodity shocks?”

“One potential answer to the question could lie in the source of the oil shock: i.e. whether it is demand or supply driven. From this point of view, it is worth noting the outlook for global growth momentum (and global oil demand more specifically) arguably seems positive at least in the near term, and the main downside risks seem to be stemming from the supply side. In such a scenario, EM assets outside of oil exporters have a chance to remain relatively insulated. It is also possible that the level of oil prices matters as well – as there might be a threshold below which producers may start incurring financial stress, which could spill-over to the broader asset market.”