Commodities Daily - August 5, 2020

> Oil prices advance ahead of EIA inventory report, nonmanufacturing PMIs for July. We expect today's EIA oil and refined product inventory report to be upbeat, showing a crude oil stock draw of around 3-4 mln bbl amid higher exports and refinery runs. We also expect the EIA numbers to fall in line with the API's reported weekly gasoline stock draw. Meanwhile, today investors will be watching services and composite PMIs from across the world. The US ADP employment report is the macro highlight ahead of Friday's nonfarm payrolls data. Also, Saudi Aramco was supposed to release its official selling prices for September today, but reports from yesterday suggest that this will be delayed until later this week or early next week.> Gold prices moved sharply higher yesterday amid drop in US Treasury yields. Gold is trading around $2,035/oz as of this writing, having climbed by nearly $65/oz since yesterday's US open. This comes amid weakness in the dollar and a sharp drop in US Treasury yields yesterday. The market is also quite sensitive to progress toward a new US stimulus package. The US Treasury secretary yesterday stated that a deal could be reached by the end of the week. Today will see several key US macro data prints, the highlight of which is the ADP employment report. OIL PRICES ADVANCE AHEAD OF EIA INVENTORY REPORT, NONMANUFACTURING PMIS FOR JULYAfter sliding from $44/bbl to an intraday low of $43.2/bbl midday yesterday, front-month Brent began to advance, hitting an intraday high of $44.8/bbl mid-way through the US trading session. It eventually settled at $44.43/bbl, fixing $0.28/bbl above the previous settlement. One of the main supportive factors yesterday was US Treasury Secretary Steven Mnuchin's remark that a new stimulus deal would hopefully be announced before the weekend, which supported risk assets in general and put pressure on the dollar. Also supportive was the US factory orders data for June showing a 6.2% increase, which is the second consecutive monthly gain. This points to a steady rebound after the pandemic-related shutdowns. Also note that according to the Wall Street Journal, the top US and Chinese negotiators are to review the phase-one trade deal and consider next steps later this month, likely starting around August 15. Given that China is not fulfilling its obligations under the deal, there is a risk of the deal collapsing, which could weigh on risk assets.Overnight, the API reported that US crude stocks fell by a hefty 8.6 mln bbl to 520 mln bbl last week (versus the EIA's latest figure of 526 mln bbl). The stock draw came amid a 0.15 mln bpd increase in refinery runs and despite a 0.12 mln bpd increase in imports. Crude stocks at Cushing rose by another 1.6 mln bbl. However, the refined product data was mixed, showing a 1.7 mln bbl decrease in gasoline stocks and a 3.8 mln bbl increase in distillate inventories. Investors are now looking to today's EIA inventory report due at 17:30 Moscow time. The Bloomberg consensus is calling for a 3.35 mln bbl crude stock draw, a 0.5 mln bbl decrease in gasoline inventories and a 0.98 mln bbl rise in distillate stocks. The upbeat API crude oil and gasoline is supporting Brent this morning, which is hovering slightly below $44.5/bbl as we write. Slight headwinds are coming from China this morning where data has shown that its services sector slowed in July from a decade high the previous month. This could be a sign of cracks in the sector's post-Covid recovery.We expect today's EIA oil and refined product inventory report to be upbeat, showing a crude oil stock draw of around 3-4 mln bbl amid higher exports and refinery runs. We also expect the EIA numbers to fall in line with the API's reported weekly gasoline stock draw. Data from GasBuddy based on retail receipts indicates that US gasoline demand increased nearly 1.6% in the week to August 1. We believe upbeat crude oil and gasoline inventory data could prove sufficient for Brent to finally push above our long-standing price target for August of $45/bbl at which point it would likely encounter technical resistance at $45.2/bbl. Meanwhile, over the course of today investors will be watching services and composite PMIs from across the world. The US ADP employment report is the macro highlight ahead of Friday's nonfarm payrolls data. Also, Saudi Aramco was supposed to release its official selling prices for September today - it typically releases them by the fifth day of each month - but reports from yesterday suggest that this will be delayed until later this week or early next week. Note that if the official selling prices rise or even decrease by less than the market expects, it would be a very clear bullish signal from the Saudis that they want to keep exports in check, which would be a strong price-supportive LD PRICES MOVED SHARPLY HIGHER YESTERDAY AMID DROP IN US TREASURY YIELDSGoing into the US open yesterday gold was trading sideways at around the $1,970/oz mark. However, rally began around 17:00 Moscow time when the US factory orders report (up 6.2% in July, versus 7.7% growth in June) and the New York ISM business conditions index (climbed from 39.5 in June to 53.5 in July) were released. The gains in gold went far beyond what could have been expected based on the macro data. Gold went on to surge by nearly $65/oz during the latter half of yesterday's session and this morning. Silver, meanwhile, climbed from $24.4/oz to $26.5/oz, respectively. The key driver was a sharp move lower in US Treasury yields. This has brought concerns of a weakening of the dollar back to the fore. Our FI team sees the unveiling of the Treasury's rather modest issuance plan for 3Q20 and 4Q20 (just $947 bln and $1.22 trln, respectively) as a key reason for the sharp demand for US Treasuries. In 2Q20, by contrast, $2.75 trln was issued. Meanwhile, the news backdrop was fairly quiet yesterday. US lawmakers were unable to reach a deal for a new round of fiscal stimulus, but talks are ongoing. Investors appear to expect a fairly large package to be approved (the current proposals range from $1 trln to $3.5 trln), which would support demand for defensive assets. Today will see several key US macro releases, the highlight of which will be the ADP employment report for July. We keep our buy recommendation for gold and update our target price to $2,050/oz in anticipation of a new fiscal deal being approved.