Oil falls as virus unsettles commodities

Singapore — Renewed fears that the coronavirus will harm global growth rocked commodity markets again on Monday, with oil and metals prices tumbling while gold soared towards $1,700 an ounce amid a global flight to haven assets.

As the deadly virus spreads more widely outside China, raising the threat of a global pandemic, finance chiefs and central bankers from the world’s largest economies said they see downside risks to the world economy persisting.

That’s spurring fresh alarm in commodity markets that had started to recover from lows hit earlier in the month when China’s virtual shutdown threw supply chains into chaos. With the IMF cutting its global growth forecast and warning that it’s also looking at more “dire” scenarios, investors are concerned that risks to raw material demand are worsening.

“With the volatility we’re seeing in the coronavirus event, that’s creating angst in the market on the back of growth and demand expectations and we’ve seen oil prices weaken,” said David Lennox, a resource analyst at Fat Prophets in Sydney. “The converse of that is the same event is carrying investors towards a safe haven play and that’s gold.”

Oil led the losses in Asian trade on Monday morning, tumbling more than 3% in London and New York. Until Friday, Brent crude had been in the longest run of gains in more than a year thanks to Chinese fiscal stimulus and new threats to supplies from Africa and Latin America.

Broader sell-off

Industrial commodities are also being hit hard, with copper sliding more than 1% on the London Metal Exchange and rubber tumbling more than 2% in Singapore. Agricultural commodities weren’t spared, with US wheat leading losses.

The declines reflect a broader market sell-off as the spread of coronavirus cases outside China spooks investors. US equity futures sank with Asian shares from Seoul to Sydney, while the Australian dollar retreated with the offshore yuan.

South Korea, the hardest-hit country after China, had earlier raised its infectious-disease alert to the highest level after a 20-fold increase in cases. The situation in Europe is also escalating, with Austria halting a train from Italy on concern there were two infected passengers on board. Italy, now the virus’s epicentre on the continent, cancelled the Venice Carnival and other events amid a rising caseload.

As they flee riskier assets, investors are searching for safety, sending gold prices to fresh 7-year highs, with bonds also advancing. Bullion prices have taken off this year, rising almost 10%, as concerns over the virus deepened and speculation mounted that the US Federal Reserve will ease monetary policy if the global impact worsens.

“The spread of the Covid-19 to Italy and South Korea is threatening the rebounds in asset prices and that fear is driving gold prices higher,” said Howie Lee, an economist at Oversea-Chinese Banking in Singapore.

Stark warning

“Upward momentum is strong and interest in gold is set to remain high until the situation abates.”

The havoc wreaked by the virus in China is a stark warning for investors as it spreads outside Asia. Oil demand in the world’s biggest importer collapsed as Beijing restricted travel and shut down factories, prompting refineries to close, stockpiles to swell and shippers seek to divert cargoes elsewhere.

The world’s biggest oil producers have foundered. The Opec+ alliance led by Saudi Arabia has struggled to agree on a collective response, dropping the idea of an early emergency gathering amid opposition from Russia.

Buyers of liquefied natural gas have been trying to get out of their contracts, with demand so poor that empty ships have been lining up in Qatar, the world’s biggest seller. Copper smelters have been forced to cut production, while containers full of frozen meat have piled up at Chinese ports because of a lack of truck drivers.

Still, commodities could rebound after bearing the brunt of the current sell-off as plants come back into operation, with activity signals in China particularly starting to improve, according to UBS Group’s wealth management unit.

Bloomberg