Commodities Daily - April 28, 2020

> Oil slides as biggest US oil ETF starts selling all of its front-month WTI contracts and as overstocking continues. The narrative for oil prices remains bearish. We expect Brent to test support at $18.3/bbl later today. If it breaks through, this could open the way to last Wednesday's low of $16/bbl. We think Brent will reach this mark at some point this week, as pressure on the front-month contract will continue to build as it nears expiry on Thursday, when it will converge with spot prices.> Gold drops to $1,700/oz. The mood across global markets is somewhat downbeat, in part due to the renewed downturn in oil prices. Another reason for pessimism among gold investors has been data from China showing a sharp drop in the country's gold consumption in 1Q20. We believe gold prices could continue to face pressure today and see a test of technical support at $1,679/oz as possible. OIL SLIDES AS BIGGEST US OIL ETF STARTS SELLING ALL OF ITS FRONT-MONTH WTI CONTRACTS AND AS OVERSTOCKING CONTINUESAfter opening the week near $22/bbl, front-month Brent rather quickly began to slide toward $20/bbl. During the US trading session, it cleared this hurdle and fell to an intraday low of $19.11/bbl. It then recovered somewhat and eventually settled at $19.99/bbl, fixing $1.45/bbl below the previous settlement. This morning, Brent has broken below the $19/bbl mark, meaning it is now down more than $3/bbl since early yesterday, while the front-month WTI contract (for June delivery) has fallen almost $6/bbl since the start of this week, to $11/bbl. The sharp correction in the US benchmark was largely attributable to the unexpected announcement of the $3 bln United States Oil Fund, which historically has invested only in the front-month WTI contract, that it wished to sell all of its holdings in the most active contract and shift into contracts with expiration ranging from July 2020 to June 2021. To be more precise, it aims to invest about 30% in the July contract and about 15% in the August, September, October and December contracts. Almost 10% will be invested in the June 2021 contract. This has also led to a widening in the spread between the WTI June and July contracts. The move is said to have been driven by new limits imposed by regulators and the broker, while Reuters has noted that the ETF has changed its investment policy five times in the last two weeks and that starting on May 1 its positions will be rolled over to the next month 10 days before the contracts expire, instead of four days before. In our view, this reduces the risks that the WTI front-month contract will drop below zero again, though it does not mitigate them completely.The main underlying reasons for the turmoil in the oil market continue to be the quickly dwindling global crude storage capacity and fears that fuel demand may only recover slowly when countries begin to ease lockdown measures. Onshore storage tanks and floating storage in tankers are rapidly filling up, leaving fewer options for traders looking to hold onto oil. US producers, meanwhile, have started delivering crude to the nation's emergency reserves as commercial storage space runs out. This was allowed on April 14 in order to help ease the nation's growing glut. The US Department of Energy said it was negotiating leasing deals with nine companies, with most of the oil to be delivered in May and June. We would like to highlight that once storage is full (even if only in parts of the world), there will be more periods of volatility and distress for the physical market in particular, especially if refiners declare force majeure. According to Argus, Urals oil differentials in northwest Europe firmed further on Monday (the Urals price rose by $0.68/bbl to $16.39/bbl), while on a CIF Rotterdam basis Urals is now trading at a $0.2/bbl premium to North Sea Dated (i.e. the Brent spot price). This comes amid the limited availability of Urals following the OPEC+ production cuts, and after Russia almost halved its export program from Baltic and Black Sea ports in May. All in all, the narrative for oil prices remains bearish. We expect Brent to test support at $18.3/bbl later today. If it breaks through, this could open the way to last Wednesday's low of $16/bbl. We think Brent will reach this mark at some point this week, as pressure on the front-month contract will continue to build as it nears expiry on Thursday, when it will converge with spot LD DROPS TO $1,700/OZAs we had expected, gold consolidated in a $1,700-1,720/oz range yesterday, which was a fairly uneventful day. This morning, the mood in global markets has turned somewhat downbeat. Commodities have been under pressure, especially oil. This has encouraged investors to exhibit caution with their positions in gold, which tested the $1,693/oz mark this morning but has rebounded to $1,700/oz as we write.Also dampening the mood among gold investors has been data from the China Gold Association, which reported that gold consumption in China was down 48% y-o-y to 148.6 tonnes in 1Q20 on a 51% plunge in jewelry purchases and a 47% drop for bars and coins. Production was relatively stable, the domestic supply of gold dropping just 11% y-o-y in 1Q20. This data from China should be quite concerning for market participants, as similar trends could be seen elsewhere in Asia, including in India, which is still under quarantine. We believe gold could remain under pressure today and see a test of technical support at $1,679/oz as possible. US wholesale inventory data for March is due at 15:30 Moscow time, while the April reading of the Richmond Fed's manufacturing gauge comes out at 17:00.