This Monday (Mar. 9th) witnessed losses in global futures markets, with stock markets and oil sector losing ground. This can be mainly attributed to two factors. One, novel coronavirus is increasingly severe across the globe, which stoked panic in economic market. Two, the talk about cutting oil supply held by OPEC in Vienna ended in failure. 

Till date, the number of confirmed coronavirus cases globally has totaled 107,000, as the epidemic spreads to 101 countries and regions. This has led to a big loss in economic activity. Last Friday, US three major stock indices all fell, and commodity markets also slumped. On Monday morning, USD to CAD is traded at 1.3592, with an intraday increase of 1.24%. Asian stock markets all lost ground. Hang Seng down 3.87% to hit a new low since last August. CNOOC down 21%, CNPC down 20%, Sinopec down 7%. Besides, Nikkei 225 opened lower by nearly 2%, KOSPI opened lower by nearly 3%. 

OPEC and Russia failed on last Friday to agree on production cuts of 1.5 million barrels per day (bpd). And Saudi Arabia on Saturday initiated an all-out oil price war: slashing official pricing for its crude and making the deepest cuts in at least 20 years on its main grades, in a bid to grab market share and push as many barrels into the market as possible. Brent crude plunged 25% when the market opened and then saw a loss over 31% to $32.14/bbl. West Texas Intermediate crude expanded its loss by 27% to $30.07. The most-active WTI crude futures contract on NYMEX traded 20,281 contracts in five minutes (6:02-6:07 on Mar 9 Bejing Time), with total value at nearly $608 million. Saudi Arabia, the world's top oil exporter, plans to raise its oil production significantly above 10 million bpd in April and possibly to a record of 12 mln bpd. Its production is 9.70 mln bpd this month.

Fig.: Crude Oil Futures Prices

Weighed on by collapses in global stock markets and crude oil prices, oil futures hit the limit-down level as soon as China’s Dalian Commodity Exchange (DCE) opened on Monday, and even remained in a trading halt for half of the morning session. Soybean oil May contract was 5,466 yuan/tonne at noon, down 226 yuan; September contract was 5,602 yuan/tonne, down 232 yuan. Palm oil May contract was 4,864 yuan/tonne, down 254 yuan; September contract 4,990 yuan/tonne, down 262.

Looking back, on Jan 10, DCE soybean oil May contract was 6950 yuan/tonne and DCE palm oil May contract was 6476 yuan/tonne, with a loss of 1,484 yuan and 1,612 yuan, respectively.  

Fig.: DCE Soybean Oil Prices

 

Fig.: DCE Palm Oil Prices

Soybean imports are forecast to be 74 cargoes with 4.825 million tonnes for March, according to Cofeed. As operation rates decline for shortages in week 10 (Feb. 29th-Mar. 6th), soybean crush at domestic mills totals 1,659,300 tonnes (meal 1,310,847 tonnes and oil 315,267 tonnes), down 267,900 tonnes or 13.9% from 1,927,200 tonnes in the previous week. Meanwhile, operation rates (capacity utilization) are 47.69%, down 7.69 percentage points from 55.38% in the previous week. As operation rates will continue the decline in the next two weeks for an increasing number of mills will suspend production for soybean shortages, soybean crush is predicted to be about 1.54 mln tonnes and 1.42 mln tonnes, respectively.

Due to increasing volume from Brazil, soybean imports are predicted to reach 7.50 million tonnes in April and 8.30 mln tonnes in May, according to the survey by Cofeed this week.

Albeit with a decline in operation rates, soybean oil stocks continue to grow as the demand remains dismal under the influence of the epidemic. In the week ending March 6th, China’s commercial inventory has totaled 1,399,550 tonnes, up 55,350 tonnes by 4.11% from 1,344,200 tonnes last week, up 527,550 tonnes by 60.5% from 872,000 tonnes last month, and up 49,550 tonnes by 3.47% from 1,350,000 tonnes of the corresponding period last year. And the five-year average at the same period is 1,179,560 tonnes. After all, a majority of leading catering businesses are unable to open and all schools have also postponed opening under the influence of the epidemic. In week 10, soybean oil traded by 30,620 tonnes, with a daily volume of 6,124 tonnes, far below a normal level of 20,000 tonnes per day.

Fig.: Soybean Oil Stocks in China

 

On palm oil front, BMD palm oil dropped nearly 10% on Monday due to its reducing appeal as the feedstock of biodiesel following a weak trend in crude futures. As of 11:26 (Beijing time), the most-active May contract on BMD was 2,228 MYR, down 223 MYR or 9.1%. The contract hit 2,209 MYR in earlier trading, the lowest since July, 2019. In February 2020, Malaysia crude palm oil production saw a month-on-month increase of 12.97%, with production estimated at 1.32 mln tonnes, according to data by MPOA. And data by shipping agency ITS showed that exports on Mar 1-5 were 120,403 tonnes, down by 73,121 tonnes or 37.78% from 193,524 tonnes in the corresponding period last month. BMD palm oil continues to come under pressure. 

 

US soybean and corn futures fell 2% and wheat down 1.8% on Monday, due to a wave of selling in commodity and stock markets triggered by concerns about a slowdown in global economy under the novel coronavirus. But under the phase-1 trade deal signed on January 15, China has committed to ramp up agricultural purchases from the U.S. by $12.5 billion in 2020 with the majority from soybean imports, compared to a baseline of around $24 billion in 2017. Besides, the Chinese government has granted new tariff exemptions on US soybean imports for Chinese crushers with one year-long validity, market sources said last Thursday. And several soybean crushers have successfully applied to tariff exemptions on importing US soybeans through online system of China’s General Ministry of Customs. 

 

But it should be noted that China will actively purchase Brazilian soybeans, bolstered by its bumper harvests and price advantages under devaluing Brazilian foreign exchange. In the first four days last week, China bought 30 cargoes of Brazilian soybeans, so a challenge that Chinese buyers face now is the less competitive US soybean prices. 

In conclusion, domestic oil market is predicted to maintain its weak trend till the epidemic is under the effective control. And participants can keep a close eye on the global epidemic and crude oil prices.