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

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

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

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.

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.

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

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 10^th – Feb 14^th 2020

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)

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

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
metalâ€™s supply deficit would be deepened by a potential output cut from the
worldâ€™s second-largest producer of palladium, Russia. A simple indicator of
palladiumâ€™s supply deficit is rapidly rising lease rates.

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

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

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 10^th -Feb 14^th 2020

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.

Agricultural commodities

Cocoa

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

Source: Bloomberg, Proshare Research

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

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 worldâ€™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 10^th -Feb 14^th
2020

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

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

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 worldâ€™s largest producer, has been affected by ageing
canes, low sugar mix ratio and drought (see Table 11 and chart 4).

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

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

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

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 10^th– Feb 14^th 2020

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

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

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

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.