Black Monday for commodities across the board as crude sheds 31%

Brokers facing margin calls, started selling all commodities to pay for losses

Crude oil remained stuck in the lower circuit this morning, shedding as much as 30 per cent in the first two hours of trading on the Multi-Commodity Exchange. The meltdown in crude had a trickle-down effect on gold, silver and base metals.

The fall was triggered by the crash in global crude following the price war between Russia and Saudi Arabia. Brent fell to $31 a barrel in the morning, down over 30 per cent from Friday’s close after Russia backtracked from the Opec production deal and instead increased production further to make US shale oil production unviable.

This led to a price war with Saudi Arabia also raising production and lowering the price, causing panic across markets and asset classes, and a rush to meet losses in derivatives of all assets including equities, debt, currency and commodities. The Indian commodity derivatives market is price taker in major commodities like precious metals and energy, apart from base metals.

As a result many players who had gone long on crude oil had to pay additional margins beyond the 20 per cent they had paid earlier, under MCX's dynamic margin structure. Globally too, there was a sell-off across the board to meet losses in crude oil and equities. 

Said Ajay Kedia, Kedia Advisory, Mumbai: “Today is a Black Day for the financial market as we have seen a ‘horrific fall’ in equities, commodities, and currencies after Crude oil plunged more than 25 per cent in one of the biggest one-day falls since the Gulf War of the early 1990s. Investors are literally bracing for a race to the bottom, as an all-out Opec ‘price war’ erupts between Saudi Arabia and Russia.”

With an extra oil output of up to 3.1 million barrel per day pouring into a slowing global economy that is now also having to deal with the coronavirus pandemic, Kedia said, “It will be rough sledding for the oil sector going forward. The price crash came at a difficult time for US shale, and has posed a conundrum for President Donald Trump. Lower oil prices are an important part of his pitch to voters, and he has frequently calling on Opec to bring them down. But a prolonged price fall could spell economic trouble for energy-producing states such as Texas and North Dakota.” 

In MCX futures, crude oil was down 29 per cent in the afternoon, recovering over 4 per cent from the day's low. All metals were down with aluminium shedding 1.5 per cent, Nickel 3.8 per cent and copper and zinc 2.5 per cent and 4 per cent respectively. Agro commodities were also were impacted.

Anuj Gupta, Deputy Vice president-Research, Angel Broking said, “Today's fall in crude oil prices may also impact other commodities like metals and farm commodities. All commodity segments corrected drastically. In general, crude is the primary driver for global growth. Fall in crude oil prices at a time when several countries are struggling to take on the spread of the coronavirus has created an emergency situation and fear of global economic growth slowdown.”