Oil stumbled out of the gate to its worst start to a calendar year in nearly three decades.
Crude’s 16% monthly plunge counts as the biggest January decline since 1991, and it’s all the more notable given how the month started – with the assassination of Iran’s second-most powerful man in a drone strike.
The oil market’s latest (black) swan dive is a testament to just how persistent demand concerns really are amid a still-tenuous outlook for global growth. And it underscores the primacy of those concerns even in an environment plagued by worries on the supply side (e.g., Iraq, Libya).
Volatility has spiked, although not to levels witnessed during some of the more notable chapters in the always exciting saga of the world’s most financialized commodity.
Annotated in the top pane are the following: The Q4 2018 collapse (exacerbated as it was by momentum chasers and gamma effects tied to producer hedges), the drama in the Strait of Hormuz last summer, Qassem Soleimani’s assassination and, of course, the September attacks on Abqaiq and Khurais.
The bottom pane just shows January’s nosedive, the worst since May, when the Trump administration escalated trade tensions with Beijing.
This is now acute enough to prompt OPEC+ to consider an early meeting in order to discuss possible measures to support prices, as travel restrictions threaten to crimp demand for jet fuel and the generalized threat to global growth weighs on sentiment.
Clearly, another body blow to the Chinese economy just as the trade war was deescalating would be materially negative for crude – and that’s an almost laughable understatement.
Speaking of laughable, have a look at this:
Bets against WTI spiked more than 50% in the week through Tuesday. That is the largest increase in nearly 18 months.
As one strategist told Bloomberg, “the market was expecting a weak-demand scenario even before the virus, and it’s not only unwinding that but also contending with a potential black swan situation”.
The “black swan” references are becoming ubiquitous. Moody’s, for example, wrote the following on Thursday:
Coronavirus May Be a Black Swan Like No Other
A coronavirus pandemic would be even more of a “black swan” than the global financial crisis and Great Recession of 2008-2009. Unlike the U.S. home mortgage meltdown, no one predicted the early 2020 arrival of a potentially devastating pandemic. And unlike the financial crisis, public-health and economic policymakers may be limited regarding their ability to remedy or offset a 1918 (or Spanish flu) type pandemic.
Moody’s Analytics’ industrial metals price index has plunged in response to the risks posed by the possible spread of the coronavirus. To a considerable degree, the latest bout of industrial metals price deflation stems from China’s outsized influence on global industrial activity.
The 7.1% plunge by the industrial metals price index since the arrival of coronavirus risks included price setbacks of 10.4% for copper, 8.7% for nickel, 8.2% for tin, 7.3% for zinc, 4.6% for lead, and 3.5% for aluminum. January 29’s base metals price index was the lowest since June 2017. Thus, this often-reliable barometer of global industrial activity fared better during the worst of the U.S./China trade dispute that came to the forefront in June 2018.