Published: February 3rd, 2020
– As the markets ushered in the week that began on Monday, January 27, 2020, the eyes shifted ever so slightly from China and the coronavirus menace to the Federal Reserve and the important rate decision it planned to make on Wednesday, January 29, 2020. And when the announcement came, the central bank announced that the rates will remain unchanged between 1.5% and 1.75%. This has been the position since Q3 of 2019. Will it be enough to rescue crude oil from the recent fall?
The Federal Reserve wrapped its monthly policy meeting on Wednesday, January 29, 2020, where a decision was reached to maintain the benchmark rate at between 1.5% and 1.75%. While this was an anticipated development, it helped steady the prices of crude oil that had earlier suffered a beating.
From Wednesday all through the week, the U.S. crude oil was trading sideways at $53.95 which represented a rise of 0.03% or an increment of $0.01. Brent crude oil was up $0.22, trading at $60.22, an increment of 0.37%. The prices of both crude and Brent oil had previously dropped to three-month lows.
Before leveling, the price of crude oil had nosedived last week shedding off over 10%. The crude futures tumbled too, losing some 15% and consequently falling off a three-week high that was recorded on January 6.
The drop is attributed to the spread of coronavirus in China. The outbreak of the disease has raised concerns that the Chinese economy may suffer even more, and that the demand for oil will reduce as a result.
China is the second-largest oil consumer in the world. A further slowdown or downturn of the economy may mean less demand for crude oil overall and low oil prices.
The fall in price was worsened by the U.S. government data that was released on Wednesday. According to the information contained in the government announcement, the inventories of crude oil had risen unexpectedly by some 3.5 million barrels in the past two weeks.
U.S. crude features fell 2.2% on Wednesday to trade at $52.14 a barrel. This was the lowest price since early August.
Metals were not spared either. The futures of front-month copper slipped 1.2% to trade at $2.5235 per pound at the New York Mercantile Exchange. This drop marks the 11th consecutive trading session the metal has lost margins and the lowest price recorded since early September.
The outbreak of coronavirus in China has adversely affected the consumption of jet fuel. This comes after Beijing restricted airlines and travels. Lion Air of Indonesia, as well as British Airways, have halted their scheduled flights to China. American Airlines also announced on Wednesday that it was contemplating cancelling flights from Los Angeles to Beijing and Shanghai.
Already, factories in the industrial zone of the city of Wuhan, which is the epicenter of the coronavirus outbreak have rescheduled the reopening after the Lunar New Year celebrations from the end of January to February 10. China is trying to limit mass migration from the area of the outbreak but these efforts have elicited ridicule from traders and investors. Traders worry that the spread of the virus will slow down manufacturing and construction activities in China. Since such a scenario will lead to decreased consumption of base metals, the traders worry that the prices may fall even further.
China consumes about half of all copper produced in the world. Caroline Bain who is the lead commodities economist at Capital Economics said that the markets are not feeling the effects of the physical demand just yet. She added that if the situation continues unabated, however, then it will mess up the global demand for copper.
While the actual demand for metals may take time before shifting, the shares of companies associated with oil and copper are hurting already. Exxon Mobil Corp. has seen its shares shed off 7.2% this month. Chevron Corp. and Freeport-McMoRan Inc. have also lost traction with the former shedding off 7.6% and the latter, 14%.
Traders admit that while shipments of commodities typically slow down around the Lunar New Year, there is compelling evidence that a greater disruption will happen after the holiday period ends.
The traders say that the situation could worsen if the trucks that transport raw materials inside China are slapped with travel restrictions. They think such a move could lead to bottlenecks at the ports. This school of thought is, however, not shared by all. Some analysts have a feeling that the slump in the price of copper is already too adverse and cannot slide any further.
Michael Haigh who works at Société Générale as the head of commodities research says that the prices of copper will rise soon if China manages to control the spread of coronavirus. He adds that while oil does not share the same fate, the tensions witnessed in the Middle East coupled with the disruptions in Libya will lead to reduced production and consequently cause price stability.
Besides, Saudi Arabia has moved to instill confidence in the crude oil markets. The country’s Minister for Energy Prince Abdulaziz bin Salman Al-Saud announced on Monday that his country was closely watching the developments in China. He added that he is confident that China will contain the spread of coronavirus.
He said that the current market responses are nothing more than psychological factors as well as negative expectations of certain traders. He added that so far the outbreak has had a limited effect on the global demand for oil.
The outbreak of coronavirus has shocked the world and led to a slump in the prices of oil and copper. However, the actions of the federal reserve to maintain the benchmark rates may have served to salvage the situation. If this fix will last remains to be seen.