Commodities Daily - April 20, 2020

> Oil prices start the week lower as front-month contracts near expiry. Oil investors are still looking for signs that the global pandemic (which is suppressing fuel demand) is easing, with Italy and Spain (Europe's hot spots) recently reporting the smallest increases in fatalities in weeks. Meanwhile, the situation in the US is not as encouraging, as no states have as yet entered a sustained downward trajectory in terms of Covid-19 cases. Deteriorating oil market fundamentals will continue to weigh on Brent, which we expect to test technical support at $25.1/bbl this week.> Gold prices slide on cautious coronavirus optimism, but rebound is likely. Gold is currently trending lower amid upbeat remarks by US politicians about progress on the next stimulus bill for small businesses, and as virus-related headlines over the weekend were more positive than not. In our view, this week gold could draw support from growing doubts about the plan to reopen the US economy, as so far no states have seen a sustained downturn in Covid-19 cases. The negative rhetoric between US and Chinese officials is also likely to weigh on risk appetite, supporting safe-haven assets. We therefore think that a rebound in gold back to $1,700/oz is likely, assuming it is first able to avoid a break below $1,675/oz.OIL PRICES START THE WEEK LOWER AS FRONT-MONTH CONTRACTS NEAR EXPIRYFront-month Brent was trading within the $27.6-29.0/bbl range on Friday for a second day in a row, failing to generate any decisive upward or downward momentum. It eventually settled at $28.08/bbl, $0.26/bbl above the previous settlement. Another sharp decrease in the US active rig count (US drillers cut 66 oil rigs last week, the biggest weekly cut since 2015, bringing the total down to 438) provided only minimal support for prices. However, Brent is swiftly declining toward the $27.0/bbl mark as we write, mirroring a strong correction in WTI that began on Friday, when the US benchmark slipped almost $3/bbl to below $18/bbl, which it has repeated this morning to break below $15/bbl. The WTI front-month contract for delivery in May has tumbled 27% since Friday morning, while the contract for delivery in June was trading near $23.6/bbl this morning and is down only 12.3% since Friday morning. The current Brent-WTI spread (as measured between comparable months, i.e. June to June) is therefore close to $3.7/bbl as we write. This latest sharp correction in WTI is due to a super contango in the oil futures market underlined by fundamental market weakness, with the global market set to run out of storage space for oil and refined products soon. As the front-month contract nears expiry, it is simultaneously moving closer to or converging with spot prices, which are trading at $10/bbl discounts to futures. The same is set to occur with the current Brent front-month contract when it nears expiry later this month (although an abrupt bullish development of some sort could of course disrupt this pattern). On the WTI market, the situation has been compounded by an announcement from the giant $3.8 bln US Oil Fund (which manages oil-focused ETFs) that it will adjust its positioning by diversifying from 100% investing in the front-month WTI contract to 80% front-month and 20% in the second month. This change is likely to prompt some traders to sell front-month futures and buy more distant contracts.Oil investors are still looking for signs that the global pandemic (which is suppressing fuel demand) is easing, with Italy and Spain (Europe's hot spots) recently reporting the smallest increases in fatalities in weeks. Meanwhile, the situation in the US is not as encouraging, as no states have as yet entered a sustained downward trajectory in terms of Covid-19 cases. This week will see further debate about when to reopen the economy and about the next stimulus package, which could support the stock market and boost risk asset appetite. We think some US states are likely to cautiously resume some industrial and retail activity from mid-May, meaning that substantial disruptions to travel, gatherings, sports and entertainment are likely to remain in place through 3Q20, weighing on fuel demand. Deteriorating oil market fundamentals will continue to weigh on Brent, which we expect to test technical support at $25.1/bbl this LD PRICES SLIDE ON CAUTIOUS CORONAVIRUS OPTIMISM, BUT REBOUND IS LIKELYOn Friday, gold prices slid almost $40/oz to $1,680/oz amid upbeat remarks by US politicians about progress on the next stimulus bill for small businesses, which is expected to deliver around $300 bln in support. This morning, gold is trending downward toward the $1,675/oz mark, as virus-related headlines over the weekend were more positive than not, with countries including Spain, Italy, China and South Korea, for instance, reporting signs of improvement. In our view, this week gold could draw support from growing doubts about the plan to reopen the US economy, as so far no states have seen a sustained downturn in Covid-19 cases. Some reports also suggest that most states will lack the capacity to test, trace and isolate new transmission clusters for most of 2Q20, which increases the risks of new outbreaks occurring if lockdowns are lifted. The negative rhetoric being exchanged between US and Chinese officials is also likely to weigh on risk appetite, supporting safe-haven assets. We therefore think that a rebound in gold back to $1,700/oz is likely, assuming it is first able to avoid a break below $1,675/oz. Beyond the Covid-19 headlines regarding both the public health and economic implications of the epidemic, this week the US will see continued debate about both the plan to reopen the economy and the next stimulus package. The global macro calendar is light this week. The Chicago Fed index is perhaps today's most significant scheduled release, while UK jobs data will be out early tomorrow morning. US jobless claims are the highlight on