Crude oil remains challenged despite bounce

Commodities depending on growth and demand have all receive bid today after Chinese State TV said that a research team at Zhejiang University has found an effective drug to treat people with the new corona virus. Copper which had already managed to find support at the key $2.50/lb level extended its gain to $2.60/lb while WTI crude oil clawed its way back above the psychological important $50/b level.

Both of these commodities have been caught in the crosshairs of a dramatic slowdown in demand from China. Some put the disruption in copper demand at 50% which is serious when considering China consumes around half of the global supply. Estimates for how much crude oil demand has slumped varies with Bloomberg putting it at a very pessimistic 20% of global demand or 3 million barrels/day.

The combination of disrupted supply channels, a prolonged holiday period in China and thousands of flights cancelled have all led to the current situation where the market is dealing with a major demand shock from the world’s second biggest economy. While producers can control supply a slump in demand is much harder to control as producers have to cut production while receiving less for what they sell.

The below table shows the damage done to the energy sector since the corona virus became the main focus on January 20. The slump in WTI and Brent has driving a further sell-off in already out-of-favor exchange-traded funds that tracks different sector stocks. The combination of speculative longs exiting the front end of the curve and the rising availability of crude and product stocks have both helped drive the front of the futures curve back into contango.