Oil sector leads commodities lower in January, but gold shines as coronavirus shakes up the market

Prices for industrial metals and grains also suffer for the month

The commodities sector suffered a broad decline in January, the first monthly loss in five months, weighed down by expectations that the spread of the coronavirus will slow the global economy--and demand for energy, grains and industrial metals.

"The markets are looking at demand destruction with the coronavirus," said Daniel Flynn, analyst at The Price Futures Group. "The only information we can navigate through is the effect of the SARS virus in 2003 which took the market one year to recover."

"We will know more as we have not hit the tip of the iceberg yet," and fears will continue "until we have a solution to incubate this virus and control it. There will still be panic sells," he told MarketWatch.

Read:What the 2003 SARS epidemic tells us about the potential impact of China's coronavirus on oil and metals (http:// www.marketwatch.com/story/what-the-2003-sars-epidemic-tells-us-about-the-potential-impact-of-chinas-coronavirus-on-oil- and-metals-2020-01-22)

The S&P GSCI index , which tracks 24 commodities across five sectors, with energy its largest weighting, lost 11% this month, just ahead of the stock market close. That follows gains in each of the last four months.

However, the Bloomberg Commodity Index , which tracks 23 commodities, with gold the heaviest-weighted, lost more than 7% in January. It posted a gain of 4.9% in December.

Gold was among the bright spots in the commodities market, with futures prices for the metal , based on the most- active contract, settling around 3.8% higher for the month (http://www.marketwatch.com/story/gold-prices-slip-after- hitting-more-than-6-year-high-2020-01-31).

"Precious metals tend to rally during times of great market uncertainty," said Craig Turner, senior commodities broker with Daniels Trading in Chicago, adding that this is know as the "flight to safety trade."

Meanwhile, the energy sector took the biggest overall hit among commodities, with futures prices for West Texas Intermediate crude down nearly 16% and Brent crude down almost 12% for the month. Heating-oil futures logged a monthly decline of nearly 20%.

Read:'Hurricane-force headwinds' pull oil lower, but the losses aren't built to last (http://www.marketwatch.com/ story/hurricane-force-headwinds-pull-oil-lower-but-the-losses-arent-built-to-last-2020-01-31)

Also see:Jet fuel demand takes a hit as coronavirus leads to travel restrictions (http://www.marketwatch.com/story/ jet-fuel-demand-takes-a-hit-as-coronavirus-leads-to-travel-restrictions-2020-01-30)

"Oil is the canary in the coal mine, as it were, for global economic activity," said Marshall Gittler, head of investment research at BDSwiss Group.

"We've already seen a lot of serious moves that will depress demand for energy: Chinese companies are taking extended vacations and some airlines are halting flights to China," he told MarketWatch. "We can easily imagine such measures spreading--people may start to avoid travel in general if the virus is spreading, and demand may fall if people think shopping presents a risk."

"What we saw with SARS was that once the epidemic was under control, demand bounced back," with Hong Kong seeing its biggest-ever jump in output during the third quarter of 2003, "after the 'all clear' was sounded for SARS," he said.

At the moment, however, "there's no way of knowing when that will be" for the coronavirus, said Gittler. "The virus seems to be spreading much more rapidly than SARS did. So while the forward market may remain in demand, demand for spot barrels is likely to be depressed for some time."

Industrial metals were also among the hardest hit commodities in January. For the month, copper futures registered a monthly loss of about 10% and iron ore was down over 11%.

"Economic output tends to decline during epidemics because of the quarantine," said Turner. "Large cities in China are coming to a standstill. This lowers demand in the short term for industrial metals and materials."

Among the grains, corn, soybeans and wheat were also down for the month. Corn futures lost 1.7%, wheat edged lower by 0.9% and soybeans fell 8.7%.

"At the risk of sounding cold-hearted, long-term global demand for grains will not be impacted unless literally hundreds of millions of people die," said Sal Gilbertie, president and chief investment officer at Teucrium Trading. " Buyers of grains are simply waiting until the panic subsides before they step in and buy at what will likely be seen as artificially low prices, when we look back after the spread of corona virus is deemed to have peaked."

"The Chinese people may now be facing travel restrictions and a subdued holiday, but they are still eating," he said. "China must still rebuild its swine herd and China will still remain the world's largest importer of soybeans." In January, however, lean hog futures fell nearly 13%.

Commodities known as the "softs," such as coffee , cocoa and sugar saw a mixed performance in January, with prices continuing to trade in their normal ranges since news of the coronavirus hit the wires, said Turner.

Coffee futures lost almost 21% for the month, but analysts said it saw little, if any, impact from news of the virus. Prices fell as rainy weather boosted prospects for production in Brazil, said Gilbertie.

"Bottom line for all commodities is that uncertainty breeds bear markets and the global economic impact from rapidly spreading coronavirus is completely unknown at this time," Gilbertie said. "Hence we are seeing bear markets across all asset classes with the exception of safe havens like precious metals."

-Myra P. Saefong; 415-439-6400; AskNewswires@dowjones.com


  (END) Dow Jones Newswires
  02-01-20 0912ET
  Copyright (c) 2020 Dow Jones & Company, Inc.

News, commentary and research reports are from third-party sources unaffiliated with Fidelity. Fidelity does not endorse or adopt their content. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from their use.