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Commodity returns plunge the most in years on virus sell-off

The outbreak is exacerbating a decline that was already under way; almost no commodity spared the rout

New York

RETURNS from commodities are plunging on fears that the spreading novel coronavirus will crush demand for raw materials, fuel and food across the globe.

The Bloomberg Commodity Total Return Index, a measure that takes into account expiry of futures contracts, as well as cash collateral invested in US Treasuries, declined 6.9 per cent last week - the most since 2011. Another gauge of returns is at the lowest level since 1987.

The outbreak is exacerbating a decline that was already under way due to rising supplies and global trade wars. Almost no commodity is being spared from the rout. Global benchmark Brent crude slid below US$50 a barrel for the first time since December 2018, a gauge of grain prices posted a second monthly loss, and even gold - a haven asset - was hit.

The carnage is showing no signs of abating as the virus continues to spread, now more quickly outside of China than within the country where the outbreak began. Major commodity trading houses are keeping employees from going abroad and several events last week at the oil industry's biggest gathering were cancelled. Fear over the economic fallout has savaged markets, sending US equities to a seventh straight loss.

"It has a major impact on demand when public life virtually comes to a standstill," said Carsten Fritsch, a commodity analyst at Commerzbank AG. "Even gold seems not immune to this at the moment."

  • Energy

US benchmark West Texas Intermediate oil plunged almost 16 per cent last week - the most since December 2008. Futures settled at US$44.76 a barrel in New York.

Brent crude for May in London fell to as low as US$48.94 a barrel, ahead of a crucial meeting this week in Vienna between Opec and its allies about whether to extend the current deal to curb output and keep prices stabilised.

Saudi Arabia wants the Organisation of Petroleum Exporting Countries and its allies to agree to collective production cuts of an additional one million barrels a day.

Natural gas futures fell 3.9 per cent as forecasts show unusually mild weather spreading across the US east in the first two weeks of March.

  • Metals

Spot gold fell as much as 5 per cent to US$1,563.07 an ounce, the biggest intraday loss since 2013. Standard Chartered Bank said the drop in bullion may be driven by investors selling the metal to cover margin calls in tumbling equity markets, although it was positive on the outlook longer term as the US Federal Reserve will ease interest rates.

Base metals posted their second monthly drop, with nickel sliding 1 per cent on the London Metal Exchange Friday.

Mining shares continued to tumble. The Bloomberg World Mining Index posted the steepest intraday loss since 2016, and Rio Tinto Group, BHP Group and Glencore Plc all declined.

  • Agriculture

In crops, palm oil had its worst week in 11 years in Malaysia.

Chicago wheat futures are headed for the worst weekly loss since March.

News that China's edible oil and animal feed factories are running at pre-virus levels has failed to stoke soya bean prices.

Sugar fell 0.4 per cent, cotton declined 1.6 per cent and cocoa slid 2.7 per cent. BLOOMBERG