Coronavirus impact on key commodities

Ole Hansen

Head of Commodity Strategy

Summary:  Commodities, most of which depends on demand from China, have been caught in the crosshairs of coronavirus developments. We take a closer look at the impact on key commodities from crude oil and copper to gold and soybeans.


While the coronavirus continues to the spread both in and outside China the market is trying to adjust positions across all asset classes. Since October investors have poured billions of dollars into the stock market and other riskier assets in the belief that the U.S.-China trade deal and ample central bank liquidity would support a period of rising asset prices and low volatility.

Another China-born virus put an abrupt end to this outlook with traders and investors having worked overtime this past week to limit exposure. Stocks, especially those in emerging markets have sold off while secure government bonds, led by U.S. treasuries, and safe haven currencies such as the Japanese yen have both received a bid.

Commodities, most of which depends on global growth and demand, have been caught in the crosshairs of these developments. Not least considering China being the world’s biggest buyer of most commodities from crude oil and fuel to copper and iron ore. Since January 20 when the Chinese Premier Xi Jinping finally issued his official instructions on dealing with the outbreak the Bloomberg Commodity Index has fallen by 4.7% while the energy heavy S&P GSCI is down by 6.7%.

Brent crude oil’s six-day drop from $66/b to $58.5/b yesterday was probably accelerated by hedge funds cutting bullish bets. Since early December when OPEC+ extended and deepened production cuts and up until January 21 hedge funds had bought close to 100 million barrels of Brent crude oil. They were left completely unprepared by the sudden change in focus from potential disruptions in Libya and the Middle East to the coronavirus impact on demand for fuel.

Having reduced exposure and after finding support ahead of the October low a $56.50/b we may now have seen the worst part of this adjustment phase. S&P Global Platts Analytics is forecasting a drop of 200,000 b/d in oil demand for the next two to three months. If however the coronavirus is as bad as the SARS outbreak in 2003, they see oil demand falling by 700,000-800,000 b/d, reflecting more than half of the expected demand growth for 2020.

Should the market manage to stabilize over the coming days some attention may return to Libya  where the nation’s output could be days from grinding to a complete halt. This according to the head of the National Oil Corp and it comes in response to an escalating crisis which has cut oil production and closed export terminals.

OPEC, increasingly frustrated by the latest slump, stands ready to support the price through extending and potentially making even deeper cuts. For now the market will remain nervous about any further escalation in China and beyond. From a technical perspective support as per the chart below is $58/b followed by the October low at $56.15. In order to attract renewed demand it first need to reclaim $60.50/b.

Source: Saxo Bank

Gold’s safe-haven credentials received another boost this past week when the virus threat sent the price higher to $1588/oz. However despite overwhelming support from developments across other markets it failed to challenge the January 8 high at $1611/oz. It highlights the extend to which the action so far this week has been all about cutting exposure. With investors already holding an elevated long position through futures and ETF’s the need to reduce across markets exposure probably led to this slightly disappointing development.

Overall this past week we have seen gold being supported by U.S. 10-year real yields falling to negative 0.05%, rising expectations for a U.S. rate cut, total global negative yielding debt jumping by $2.3 trillion and the biggest two-day sell-off in U.S stocks since last October. Against this the dollar has with the exception against JPY and CHF been strengthening thereby creating some headwind.

Gold’s lack of reaction to an overwhelming bullish environment has left a few nervous longs looking for the exit. While we maintain a long-term bullish outlook for different reasons than the current in 2020 the market may once again be exposed to a small correction. Especially if the U.S. stocks, led by decent earnings from the technology companies this week continue to recover. Support below at $1560/oz followed by $1535/oz.

Source: Saxo Bank

HG copper’s near 10% plunge during the past week highlights not only the impact China has on demand for industrial metals, but also its role as one of hedge funds’ favorite macro plays on China developments. The eight-day plunge from close to $2.9/lb back below $2.6/lb is one of the longest ever for the white metal and it has been driven by short-selling interest from funds looking for a hedge against the potential economic fallout from the coronavirus in China and abroad. Any further weakness could see copper move close to the 2018-19 area of support below $2.55/lb.

China’s ability to deliver on its phase one trade deal commitment to buy energy and agriculture products has also been called into doubt. As a result the price of soybeans has slumped back to levels seen before the trade deal was agreed. Coffee meanwhile has suffered due to an extended long not receiving any support from a weaker BRL and a rising contango which provides short-sellers with a premium at each futures roll.

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992