Oil prices rebound, but metals slip amid further spread of coronavirus outbreak

New York — Commodity prices were mixed Tuesday as the continued spread of a coronavirus outbreak in China and around the globe sparked concerns of lower demand growth.

In oil, Dated Brent edged higher, having fallen the prior five trading days.

"The market selloff is easing as expectations grow that we could see some Chinese businesses return to normal after many tech firms announced an office return date of February 10th," said OANDA analyst Edward Moya.

"There is an impact on prices from the coronavirus, but it is overdone. Given the fragility of the Chinese economy, the virus will have serious implications and we think the Chinese government would have to intervene in the second half of the year to help the economy," Edward Morse, global head of commodity research at CitiGroup, said. "Today was the first day when reality begins to kick in. I wouldn´t be surprised if we saw a $5 retrenchment (in prices)."

The Chinese government has extended the Lunar New Year holiday period, closing businesses in key provinces and suspending air and rail travel in a bid to contain the virus. The virus has now sickened 4,682 people globally, with cases emerging in the US and Europe, while the death toll across China has climbed to 106, according to CNBC.

The US Centers for Disease Control expanded its non-essential travel warning to all of China.

Ports in Hebei province, a major Chinese steelmaking hub, are closed as of Tuesday, hampering both iron ore imports and steel exports.

"The concentration of the virus in China, the strong growth of Chinese steel production/exports since 2003 are likely create a demand vacuum across the region," Jefferies' Australia-based analysts Simon Thackray and Abraham Akra said in a note. "We believe, inventories of steel globally are likely to rise and offset the fall in Chinese steel production, weighing on global steel prices. Similarly, nonferrous scrap demand is likely to fall."

PRICES

Oil

Metals

The London Metal Exchange three-month copper price ended $63 lower Tuesday at $5,745/mt. That was down $525, or 8.3%, from January 20. Copper is often seen as a barometer for global economic health.

Precious metals have held up as investors increase allocation to safe-haven assets, with London gold closing at $1,574/oz, Platts assessments show.

Platts assessed the key 62% Fe Iron Ore Index at $84.70/dry mt CFR North China Tuesday, down 8% from the previous market assessment last Friday, on concerns over the virus' impact. China is the world's biggest iron ore consumer, taking more than half of seaborne supplies.

Steel prices are likely to fall at a greater rate than those of iron ore, with steel production temporarily reduced in the Chinese cities affected, according to Jefferies' analysts.

TRADE FLOWS

Oil

S&P Global Platts Analytics is forecasting a drop of 200,000 b/d in oil demand for the next two to three months, reflecting roughly 15% of the expected oil demand growth in 2020.

Platts Analytics estimated that in a "worst-case scenario" where Wuhan coronavirus is as deadly and contagious as the 2003 SARS pandemic, global jet demand could fall by 700,000-800,000 b/d.

The coronavirus currently has a mortality rate of 3%, below the 10% rate for SARS, and governments "have better technologies to contain the spread of the virus," according to Platts Analytics. So it is likely that the Wuhan coronavirus could lower global jet demand by 50,000-150,000 b/d for the next two months.

Platts Analytics estimated that the SARS virus reduced global oil demand, led by jet fuel, by 230,000 b/d for around six months in 2003, primarily in the second quarter. However, global jet fuel demand has since grown by 47% to 7.11 million b/d, with "growth heavily concentrated in China, Southeast Asia, and South Asia."

China's Ministry of Transportation said air passenger numbers Monday were down 39% year on year to 1.07 million people.

China's apparent demand for jet fuel rose 7.3% year on year to 898,000 b/d during the first quarter last year, Platts Analytics' data showed. Apparent demand for the fuel in mainland China dropped around 35% on the year to 131,000 b/d in May 2003, according to Platts Analytics' data.

China's gasoline demand may also register a year-on-year decline in Q1 as the central Hubei province, where Wuhan is located, is considered one of the major transportation hubs along the Changjiang River.

The jet market is currently subject to a number of bearish factors. It is in a period of low demand and the upcoming refinery turnaround schedule that usually tightens the market is expected to be smaller and more spread out than usual, limiting its bullish impact.

OPEC is considering deeper oil production cuts, or extending its current supply curbs beyond their March expiry, if the coronavirus outbreak spreads further, according to a source from the organization.

Metals

As of Tuesday, ports in Hebei province, a major Chinese steelmaking hub, have been closed, hampering both iron ore imports and steel exports, and many cities have delayed a restart of construction until further notice.

Some major mills in north China, including Hesteel Group, Anshan I&S and Shougang Group have been heard to be planning blast furnace maintenance in February.

China is the world's biggest steelmaker, producing 996.3 million mt of crude steel in 2019, up 8.3% on 2018 and accounting for 53.3% of global output, a growing share, according to the World Steel Association.

A temporary fall in Chinese steel production and demand due to the outbreak and related restrictions could lead to higher steel production elsewhere and a buildup of inventories that may weigh down global steel prices, according to analysts at brokerage firm Jefferies.

A South Korean mill source said production cuts may help Chinese mills maintain steel prices.