Covid-19 continues its journey and weighs on global economy

Your Bi-weekly update on edible oils & fats by Aveno

March 6th, 2020

To some the outlook for the global economy continues to darken, and they fear a substantial decrease in petroleum demand as widespread quarantines, factory shutdowns, less transport of goods and travel restrictions are cutting down petroleum consumption. NASA’s satellite pictures of China revealed the economic slowdown through less visible air pollution over the industrial regions and some reports claimed that “out-of-home-eating-activities” had dropped by over 40%. All this, high stocks and a mild winter led to lower petroleum prices. 

Normally the impact from an economic recession, on agricultural commodities, is limited because the demand for food stays more or less unchanged. If people can afford it and if logistics allow it, people will not change their eating habits much. But our business is linked to energy prices through the production of biofuels. Lower petroleum prices and lower overall demand for fuel can temporarily and substantially reduce demand for vegetable oils from biodiesel producers.

Source: European Commission / IGC, Monthly average close March 5th 

Globally the number of infected people still increases and the infection is spreading into more countries. But there are now more new infections reported outside of China, than in China. This indicates that the Chinese situation is getting under control. The spread of the virus in China peaked and economic life in the affected provinces is returning to normal. Things develop slower than initially hoped for, but most employees seem to return to work after their prolonged Chinese New Year's holiday and the use of coal in power plants has also normalized. Moreover, the Chinese government is doing everything it can to support and is determined to make up for the backlog. Logistic bottlenecks are getting solved and the number of ships in Chinese ports is nearly back to normal.

Source: Malaysian Palm Oil Council / Palm Oil Prices in Ringgit/t: Courtesy of Bursa Malaysia Berhad

Lower prices triggered renewed Chinese and Indian interest for palm oil which is positive for the oil complex. Palm oil gained 5% on Wednesday as buyers stepped in ahead of the Muslim holy month of Ramadan. Typically, demand for palm oil picks up before Ramadan as importers increase inventory in anticipation of increased demand and lower production. Ramadan is scheduled to start on April 23rd.

In Europe, the rapeseed market underwent downward pressure but stabilized as in February China bought 120.000 tons of EU rapeseed oil for shipment AMJ and the next crop has been revised downwards by crop analysts. Buyers are now in a wait and see mode, evaluating / contemplating on world economy, before moving. 

No change in South American weather. The Argentinian and Brazilian soybean crop estimates continue to look excellent. China not in the mood for big soybean buys.

Most refinery capacities for sunflower seed oil in North West EU are sold out for next couple of months. And groundnut oil is also scarce. 

Source: Trading Economics

Brent petroleum lost about 25% since the beginning of the year. Oil producers are looking at a production limitation agreement to support prices while world demand dwindles on the back of COVID-19. Lower prices may also command a lower shale oil production as many U.S. shale oil drillers hardly make any money with current prices.

The Fed cut interest rate 50 bps (to 1.25%). The Euro traded higher against the USD as investors sold dollars on expectations that the Fed will need to cut rates more to support the economy while the ECB has less room to loosen monetary policy. Lower petroleum prices and a cheaper dollar result in lower automotive fuel prices at your favorite pump!