Oil Slides While Gold Heads to $1,700 as Virus Rocks Commodities

Renewed fears that the coronavirus will harm global growth rocked commodity markets again on Monday, with oil and metals prices tumbling while gold soared toward $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 International Monetary Fund 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 toward 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.

Industrial commodities are also getting 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 U.S. wheat leading losses.

The declines reflect a broader market sell-off as the spread of coronavirus cases outside China spooks investors. U.S. equity futures sank with Asian shares from Seoul to Sydney, while the Australian dollar retreated along 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 was also escalating, with Austria halting a train from Italy on concern there were two infected passengers on board. Italy — now the virus’s epicenter on the continent — canceled the Venice Carnival and other events amid a rising case load.

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

Key commodity markets as of 12:40 p.m. in Singapore
  • Brent crude -2.5% to $57.04/bbl
  • WTI crude -2.3% to $52.13/bbl
  • Spot gold +1.1% to $1,661.17/oz
  • Copper (LME) -1.1% to $5,702.50/ton
  • Iron ore (SGX) +0.1% to $89.91/ton
  • Rubber (SGX) -2.1% to $1.35/kg
  • Wheat (CBOT) -1.3% to $5.45/bushel

Shares of some of the largest commodity companies were also affected by the sharp moves in prices. Newcrest Mining Ltd., Australia’s largest gold producer, climbed as much as 5.4%, while BHP Group, the world’s biggest miner, slumped more than 3%. S-Oil Corp., a South Korean oil refiner, fell 2.6%.

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 bad 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 in particular starting to improve, according to UBS Group AG’s wealth management unit.

“Given the fact that relative to other assets, commodities still remain very low and particularly taking the burden of this reaction, then you would expect the recovery to be quite sharp as we go into the third quarter,” Wayne Gordon, executive director for commodities and foreign exchange, said in a Bloomberg TV interview.

“For oil, it’s a different scenario, a lot rides on what OPEC says at the start of next week, and already the demand side has been very weak for oil in the first quarter,” said Gordon. “But the snap back will come, and it will come at a point when OPEC is likely to curtail production somewhat. So there is hope.”

Beijing is now pushing for people to get back to work, loosening the criteria for factories to resume operations, as it tries to find a balance between containing the virus and preventing a slump in the world’s second-largest economy. But it’s contagion outside China that’s spooking markets.

“The coronavirus situation looks like it’s stabilizing in China, but now we’re getting pockets of it elsewhere, and that’s a concern,” said Lennox of Fat Prophets. “Geographically as more pockets of it appear, there’s going to be people who have escaped those pockets and gone elsewhere, and they create another pocket. And that’s what investors are worried about. It’s like a ripple effect outward.”

— With assistance by Sharon Cho, and Haidi Lun

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