Commodities Daily - December 16, 2019

> Oil inches higher on Friday amid lack of details on phase one deal. This morning, upbeat November Chinese industrial output and retail sales are supporting oil prices. In the period, 13.65 mln bpd of oil was refined in China, up from 13.62 mln bpd in October but short of the record of 13.75 mln bpd set back in September. Today, investors are eyeing preliminary Markit PMIs for the eurozone and US for December and the EIA's drilling productivity report. We think Brent is likely to retest yesterday's highs today. With the phase one deal, the market is focused on where the IMF and World Bank see global economic growth, as well as how much the IEA, OPEC, and EIA expect oil demand to grow.> Gold prices higher despite drop in trade tension between US and China. Both the US and China announced that a preliminary agreement on a phase one deal had been reached. This entails the tariffs on Chinese goods that were due to take effect on Sunday being postponed and the 15% tariffs implemented in September cut in half. CFTC data published on Friday for the week ending December 10 showed a drop in open long positions in gold. Today, preliminary PMIs are due from a number of countries, while the US will publish the Empire State manufacturing index. We expect the positive trend in the gold market to remain in place ahead of next week's Christmas holiday.> Base metals prices fail to respond to news of the phase one deal. This morning, China released strong industrial production and retail sales data for November, while the PBoC strengthened the yuan to its highest level since August. We expect the sideways trend to prevail. At we write, 3m forward contracts stand at $6,150/tonne for copper, $1,770/tonne for aluminum, $14,200/tonne for nickel and $2,250/tonne for zinc.OIL INCHES HIGHER ON FRIDAY AMID LACK OF DETAILS ON PHASE ONE DEALDuring the first half of the day on Friday, Brent gained around $0.5/bbl to $65/bbl against the backdrop of the first official details about a US-China phase one deal. In the run-up to the US session, downbeat US retail sales for November (despite a strong labor market) raised concerns about US 4Q19 growth, pressuring Brent back to $64.5/bbl. Earlier last week, Donald Trump had said a "big deal" was very close and various reports had suggested that US negotiators had offered not just to suspend the tariffs on $160 bln of annual Chinese imports set to take effect on Sunday, but also to cut rates on previously levied tariffs on about $360 bln of Chinese imports by up to half. On Friday, Trump at first downplayed the scale of these cuts, while a press conference in Beijing failed to provide details about the amount of US goods China had agreed to purchase. China's vice finance minister, however, did state that a formal agreement had been reached and also confirmed that the new US tariffs would be shelved. US Trade Representative Robert Lighthizer later provided more details, saying that over the next two years China would import at least $200 bln in additional US goods and services on top of the $186 bln ($130 bln in goods and $56 bln in services) it imported in 2017 before the trade war stated. Back in 2017, China bought $24 bln of US agricultural goods, and according to Lighthizer, Beijing has now committed to buy $32 bln more over the next two years, about $16 bln a year. Trump later said he expects Chinese purchases of US agricultural products to reach $50 bln a year "pretty soon." For its part, the US halved the 15% duty on $120 bln of Chinese imports levied in September, while maintaining a 25% tariff on $250 bln - investors, however, had been expecting a bigger rollback. The countries' trade representatives are supposed sign the 86-page agreement in early January, when the full and formal details will be revealed. Having peaked at $65.8/bbl during the day, Brent eventually settled at $65.22/bbl, fixing $1.02/bbl above the previous settlement. Given the agreement's limited nature and the lack of details on it, it will provide only a slight tailwind for oil prices. That said, it comes following Saudi Arabia's agreeing to deeper productions cuts in 1Q20, so amid a slowdown in US oil production growth, Brent should remain supported in a range of $60-65/bbl in 1Q20. This morning, upbeat November Chinese industrial output and retail sales are supporting oil prices. In the period, 13.65 mln bpd of oil was refined in China, up from 13.62 mln bpd in October but short of the record of 13.75 mln bpd set back in September. Today, investors are eyeing preliminary Markit PMIs for the eurozone and US for December and the EIA's drilling productivity report. We think Brent is likely to retest yesterday's highs today. With the phase one deal, the market is focused on where the IMF and World Bank see global economic growth, as well as how much the IEA, OPEC, and EIA expect oil demand to LD PRICES HIGHER DESPITE DROP IN TRADE TENSION BETWEEN US AND CHINAOn Friday, investors were awaiting further information about what was reported as a phase one trade deal having been reached. US and Chinese officials held nearly simultaneous but separate briefings at around 18:00 Moscow time. The following terms were reported: > The tariffs on $160 bln worth of Chinese goods that were due to take effect on Sunday would not be implemented. China would also not introduce new tariffs. > The 15% tariffs on $120 bln worth of Chinese goods that were put in place in September 2019 would be reduced to 7.5%. > The tariffs that the US had earlier put on $250 bln worth of Chinese goods would remain in place. Moreover, both sides reserved the right to impose new tariffs if any of the agreements are breached. The US and China are currently continuing to work out the legal details of the agreement, which might be signed by the countries' respective trade representatives in the first week of January. On Friday, investors reacted with a certain amount of skepticism to the statements about the trade deal, as there was disappointment over the very limited roll-back in existing tariffs and uncertainty over the targets for Chinese agricultural purchases. As a result, demand for safe heaven assets, including gold, remained in place. Gold, which climbed 0.4% on Friday, is trading at around $1,478/oz this morning. It is entirely possible that investors will increase holdings in gold. CFTC data on open speculative positions in gold for the week ending December 10 showed that, heading into the Fed meeting, investors cut almost 25k long positions in gold. However, net long positions remained high at almost 197k contracts. Today, preliminary PMIs are due from a number of countries, while the Empire State Manufacturing index will be published in the US. We expect the positive trend in the gold market to remain in place ahead of next week's Christmas SE METALS PRICES FAIL TO RESPOND TO NEWS OF THE PHASE ONE DEALOn Friday, 3m forward contracts for copper moved above $6,200/tonne in anticipation of news on the trade deal but failed to hang on and fell 0.4% by the close (see the gold section for more detail on the agreement). This morning, base metals markets opened with more optimism. China released strong industrial production and retail sales data for November, while the PBoC strengthened the yuan to its highest level since August (to 6.9915 against dollar). Industrial production expanded 6.2% y-o-y in November, well above the October figure (4.7%), while steel output rose 4% (and was up 7% y-o-y in 11m19). Retail sales increased 8% y-o-y (versus 7.2% growth in October). The positive numbers pushed 3m forward contracts up this morning to at $6,150/tonne for copper, $1,770/tonne for aluminum, $14,200/tonne for nickel and $2,250/tonne for zinc. We expect base metals to trade sideways ahead of Chinese copper and zinc production data for November, due