Commodities Markets Take Bearish Turn As Traders Contemplate Coronavirus

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Tuesday, February 18, 2020  /  05.30PM / Funsho Idowu with Adesola Borokinni, Proshare research/Header Image Credit: 123RT.com

 

Global commodity markets have taken on a bearish hue as traders in different markets review the impact of the recent outbreak of the Chinese Coronavirus on their respective markets. While the market for metals has remained stable and flat, the market for primary agricultural goods has dipped over the last few weeks. The petroleum market has been glum as the organization of petroleum exporting countries (OPEC) and its non-member allies consider options for keeping oil prices up.


General global commodities markets for the past week recorded both rises and fall in prices of traded goods with the petrol market giving oil-dependent countries like Nigeria a few headaches.


Brent Crude and WTI

Table 1: Change in Brent price Feb 10th - Feb 14th

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The past week kicked off with WTI falling below $50 per barrel to $49.57 per barrel while Brent Crude was bullish at $53.27 per barrel. There has been major uncertainty in the oil market caused by speculations concerning the Coronavirus in China. The Chinese economy is one of the largest importers of oil, since the outbreak of the coronavirus and the restrictions of movement in the country there has been a fall in demand for oil.


A possible reason for the decline in the WTI prices on Monday was attributed to the hesitation from OPEC plus to cut its oil supply by 600,000mbpd further. Brent Crude sold at $57.32, the Bullish prices recorded could be a a result of oil production cuts of about 600,000 barrels per day by OPEC (see Table 1 above).


Chart 1: M-O-M % changes in Brent Oil prices

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Source: Bloomberg, Proshare Research


Brent oil price has a downward trend. Brent oil prices recorded both increases and decreases in its prices from September 2019 to January 2020. There were positive changes in Brent oil prices in September, November and December of 2019 by +2.58%, +1.46% and +9.79% respectively while there were negative changes in the Brent oil prices in October 2019 and January 2020 by -1.91% and -14.74% respectively (see chart 1 and Table 2).

 

Table 2:  Monthly % change in Brent price Aug 2019-Jan 2020

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Brent oil prices were bullish as it recorded a negative percentage change of -14.71% in January 2020, as oil prices fell from $66.41 per barrel in December to $56.62 per barrel in January. The sharp decline in Brent oil prices in January was the consequence of the widespread of the coronavirus (Covid-19) in China which caused a restriction in movement, shutdown of productive activities and fall in the demand of oil. China is one of the Biggest players in the global oil market and is the second-largest consumer of crude oil. The rapid decline in the oil demand in China has generated a lot of uncertainties as regards the oil market. The uncertainties recorded in the global oil market will harm countries whose economic growth and sources of export revenue mainly hinges on oil export revenues such as Nigeria, Russia, Angola etc (see Table 2).


Impact of Plummeting Oil price

IEA (International Energy Agency) projects that global oil demand will most likely record a contraction resulting from a fall by 435,000 barrels a day(b/d) in the first quarter of the year for over a decade when a similar situation played out. The outlook is on the backdrop of the slow demand for oil in the Chinese economy which is currently plagued by the coronavirus.


In its monthly oil market outlook on Wednesday, OPEC also dramatically lowered its forecast for oil demand growth this year, citing the coronavirus outbreak as the "major factor" behind its decision. It revised its outlook for global oil demand growth downwards to 0.99 million barrels per day (bpd) in 2020, down by 0.23 million bpd from the previous month's estimate.


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Gold

China is one of the largest consumers of gold in the world. The coronavirus is yet to have any meaningful impact on the global demand for gold. The prices of gold for the week under review were both bullish and bearish at different days but there were no major spike or dip in the prices of gold.


Chart 2: M-O-M % changes in Gold prices.

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Source: Bloomberg, Proshare Research

 

The price of gold was bearish in September and November 2019 as their prices fell by -3.25% and -3.35% while its price was bullish in December 2019 and January as their prices rose to +2.68%, +3.51% and +4.52% respectively (see chart 2 and Table 3). There are bullish projections for the price of the gold metal as some Muslim nations which include Iran, Malaysia, Turkey and Qatar are considering trading among themselves in gold as a hedge against any future economic sanctions on them.  Another plausible reason for the bullish projection is the uncertainty caused by the US and Iran conflict and also the increase in gold hoarding by countries such as Russia which may cause a surge in gold prices.

 

Table 3:   monthly % change in Gold Aug 2019-Jan 2020

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There were expectations that the price of gold would fall alongside the oil-price. Only about 10% of gold produced is used industrially for the manufacture of electronics, as gold is not a major industrial metal like iron, aluminum and copper hence, the reason why it did not record a major dip in its prices.

 

Table 4:  Change in gold prices Feb 10th - Feb 14th 2020

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The price of gold at the start of the week was $1572.15 t/oz, there was no major spike or dip in its prices, as prices fluctuated between$1572.15-$1576 t/oz (see Table 4). Gold prices were bearish at +0.51% between Monday and Friday as prices rose from $1572.15 t/oz on Monday to $1584.06t/oz on Friday.

 

Platinum and Palladium

These two metals are widely used in the production of jewellery and the automobile industry, although platinum is rarer. Palladium is one of the most expensive of all the metals because of its industrial use in the automobile industries, it is a key component in pollution control devices for cars and trucks.

 

Chart 3: Platinum and Palladium prices Aug 2019-Jan 2020(t/oz)

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Source: Bloomberg, Proshare Research


Palladium recorded a consistent rise in its prices from August till January 2020. The price rose from $1534 t/0z in August 2019 to $2,288 in January 2020 (see chart 3 above and Table 5).

 

Table 5Monthly % change in Palladium Aug 2019-Jan 2020

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Palladium recorded an increase in its price by +9.26% from August 2019 to September 2019. There was also a record high percentage increase of +17.63% in Palladium from December 2019 to January 2020 (see Table 5). The continuous bull movement was attributed to concerns that the metal’s supply deficit would be deepened by a potential output cut from the world’s second-largest producer of palladium, Russia. A simple indicator of palladium’s supply deficit is rapidly rising lease rates.

 

Table 6:  Change in Palladium prices Feb 10th -Feb 14th 2020

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The price of palladium fluctuated between $2360.6 t/0z and $2,434.65 t/0z for the week. The week started with Palladium price at $2360.6 t/0z and ended with Palladium being bullish at $2,434.65 t/0z recording a percentage increase of +1.45% from the previous day (see Table 6).

 

On the other hand, the prices of platinum were both bullish and bearish at different months.  The price of platinum fluctuated between $934 t/oz and $961 t/oz between August 2019 and January 2020. The price of platinum in December rose from $896 t/oz in November and was bullish in December at $967 t/oz while in January 2020 it was bearish at $961 t/oz which was a result of investors showing greater interest in other metals like gold and South African mines increasing production of platinum. The uncertain fluctuations in the price of platinum are the result of an uptick in global economic uncertainty. Slow demand for platinum is the result of an increase in recycling, ample above-ground stocks, subdued demand for jewellery and slow growth in new vehicle sales in some parts of the world and modest growth in the Chinese economy.

 

Table 7: Monthly % change in Platinum Aug 2019-Jan 2020

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Platinum was bullish in October and December of 2019 as its price rose by +5.63% and +7.87% respectively while it was bearish in September, November and January as its price fell by -5.43%, -3.93% and -0.57% respectively (see Table 7)

 

Table 8:  Change in Platinum prices 10th -Feb 14th  2020

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The price of platinum at the beginning of the week was $963.27 t/oz while it ended the week at $965.68 t/oz recording a fall in its price by -0.46% from the previous day. There was no major spike or dip in the price of platinum during the week.

 

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Agricultural commodities

Cocoa

Chart 3: M-O-M % changes in Gold prices

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Source: Bloomberg, Proshare Research

 

Table 9: Monthly % change in Cocoa Aug 2019-Jan 2020

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In September 2019, cocoa recorded a bullish price and had a positive change of +9.9%, this was a tremendous recovery after a decline in prices since the start of the year. The rise reflects the alliance between Ghana and Ivory coast which are one of the largest producers of cocoa in the world, they both produce more than 60% of the world’s cocoa, these two countries had an official agreement to have a price floor of $2600 per tonne. In December Cocoa prices were bearish, as there was a negative change of -5.16% in its price which was due to the global supply glut. In January 2020, cocoa price was bullish at $2,801 per tonne and it recorded a percentage change of +13.72%, which was the highest in about 20months, this was due to rainfall being below average in some key growing areas in ivory coast which reduced their yield drastically (see chart 3 and Table 9).

 

Table 10: Change in prices Feb 10th -Feb 14th  2020

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There were no major changes in the price of cocoa for the week ended. The week started with the price of cocoa at $2,878 per tonne and it closed at $2,895 per tonne on Friday. The price of cocoa recorded a bullish growth of +0.94% as its price grew from $2,868 per tonne on Thursday to $2,895 per tonne on Friday.

 

Sugar

Table 11: Monthly % change in Sugar Aug 2019-Jan 2020

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In September 2019, there was a progressive and positive change in prices of sugar asides for October 2019 when there was a dip in its price as it recorded a negative change of -1.9% which was a result of an increase in production. In November, the price went back to its bullish nature, as the price of sugar has been upward trending.


Chart 4: M-o-M % change in Sugar price

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Source: Bloomberg, Proshare Research


It recorded bullish change in its prices in November, December 2019 and January 2020 by +4.27%, 3.71% and +8.87% respectively. The significant change relates to a supply shortfall as a result of drought in Thailand; India has also reduced its output as a result of adverse weather conditions while Brazil, the world’s largest producer, has been affected by ageing canes, low sugar mix ratio and drought (see Table 11 and chart 4).

 

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Table 12: Change in Sugar prices 10 Feb-14Feb 2020

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There were no major changes in the price of sugar for the week. The week started with the price of cocoa at $15.04 per lb and it closed at $14.78 per lb on Friday. The price of cocoa recorded a bearish growth of -1.73% as its price declined from $15.04 per lb on Monday to $14.78 per lb on Friday (see Table 12).

 

Corn

Table 13: Monthly % change in corn prices Aug 2019-Jan 2020

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The price of corn fluctuated between $371.25 and $381.25 per bu between August 2019 and January 2020. Corn prices were bullish in September, October and December as prices changed by +4.51%, +0.52% and +1.84% respectively while it recorded a bearish price in November 2019 and January 2020 as prices changed negatively at -2.24% and -1.8% respectively (see chart 5 and Table 13).

 

Chart 5: M-o-M % changes in corn prices

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Source: Bloomberg, Proshare Research

 

Bearish corn prices in January 2020 could be the result of increasing fears that arose as a result of the coronavirus spread and the rallying U.S dollar (see chart 5 and Table 13).

 

Table 14 Change in corn prices Feb 10th- Feb 14th 2020

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There was no major change in the price of corn during the week. The price of corn during the week was between $381.75 and $384.75 per bu. There was an increase in corn prices by +0.79% from $381.75 per bu to 384.75 per bu on Friday. 


Wheat

Chart 6: M-o-M % changes in wheat prices

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Source: Bloomberg, Proshare Research


Wheat recorded a bullish outlook in September, October, November and December 2019 as it recorded growth in its prices by +4.87%, +2.62%, +6.49% and +2.63% respectively while it recorded bearish growth in its prices in January, as its prices grew by -0.40% from $556 per bu in December to $553.75 per bu in January 2020. 

 

Table 15: Monthly % change in wheat prices Aug 2019-Jan 2020

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The fall in the prices of wheat in January was the result of a global supply glut of wheat (see chart 6 and Table 15).

 

Table 16: Change in wheat prices Feb 10th -Feb 14th 2020

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The price of wheat at the beginning of the week was $552 per bu and it closed at $544.75 per bu.  The wheat price closed bearish at -1.31% from $552 per bu on Monday to $544.75 per bu.

 

In Fear of A Virus

The spread of the coronavirus (COVID-19) has caused panic in global commodity markets. The coronavirus has spurred uncertainty in the oil market which has led to OPEC cutting the supply of oil to boost the price.  Asides from its effect on oil and corn prices (as at last week) the coronavirus did not have any significant effect on other commodities. Commodities such as palladium, platinum and gold did not react to fears and uncertainty arising from the coronavirus as they are not major inputs required in China for its productive activities.


Continuity in the oil price fall will most likely affect countries such as Nigeria and Russia that are dependent on crude oil production and export. There are also projections of the gold market being bullish in the future as a result of gold hoarding by nations such as Russia and Islamic nations which includes Iran, Malaysia, Turkey and Qatar's decision to start trading amongst themselves in gold rather than dollars. There are also strong bullish projections for palladium prices arising from increasing demand and shortage in supply while bullish prices of sugar were the result of drought in Thailand and Brazil.


The Chinese government's policy actions such as pumping liquidity into the economy and improving its health facilities to mitigate the negative influence of the virus will help cushion the Chinese and global economy against further demand and supply shocks that may occur in coming months.

 

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