The GERM Report

-Houthi action, Iranian elections could add a risk premium to Brent

-Japan’s economy slips further into contraction

After failing to breach the $60 mark in the previous session, Brent crude oil was in retreat in early Friday trading on renewed concerns about the coronavirus. Reports that the virus was spreading in Chinese prisons has spooked investors wary of the slightest blow to demand in a fragile economy. Japan’s PMI, meanwhile, slipped into contraction, contributing further to the pessimism.

Brent crude oil was trading at $58.27 per barrel at 8 a.m. ET, down some 1.7% from the previous session. Gains early this week were supported by a drain on fuel inventories, though traders are selling in an effort to reduce risk exposure during the weekend.

All three segments – manufacturing, services and the composite – showed contraction in the Japanese economy in February. IHS Markit said PMI readings below 50, the point separating growth from contraction, are indicative of pressure from the virus outbreak on the world’s third-largest economy. Adding to those concerns were reports that more than 200 people in Chinese prisons tested positive for the coronavirus. The GERM Report has suggested there may be some market scapegoating on the outbreak, with weak quarterly earnings reflective of past rather than current events. The Associated Press now quotes Singapore’s prime minister as saying there may be some truth to that sentiment.

“Fear can do more harm than the virus,” Prime Minister Lee Hsien Loong said.

Even still, Russel Hardy, the CEO of oil trader Vitol, told the Bloomberg news agency the coronavirus may be taking millions of barrels of oil demand out of the market during the first quarter. Farm manufacturer Deere & Company, meanwhile, reported net income for the first quarter was up some 3.8% year-on-year and sentiment within the US agricultural sector has improved slightly on easing US-Chinese trade tensions.

“At the same time, activity in the construction sector has slowed leading to lower sales and profit for our Construction & Forestry division,” said CEO John C. May in a statement. “Also impacting results in Deere’s construction equipment business were our actions to reduce factory production and lower inventories in response to current market conditions.”

Some support for commodities may be coming from the geopolitical realm. Reports early Friday suggested the Houthi rebel group in Yemen carried out targeted drone strikes on Saudi Aramco facilities near the port of Yanbu on the Red Sea coast. Earlier reports indicated Saudi defense systems had intercepted ballistic missiles fired from Yemen.

The Houthi attacks may be a sign of things to come in the region. Iranian hardliners are expected to emerge successful in parliamentary elections, just as Washington tightens the screws on the Islamic republic. The global Financial Action Task Force, a group tasked with sniffing out dirty money, may blacklist Iran on Friday, further isolating Iran from the international market. Volatility emanating from Iran may add tailwinds to crude in the coming days. Crude oil prices shot up 14% in one day of trading when drone strikes ostensibly linked to Iran hit Saudi Aramco facilities in September.