Commodities Daily - February 26, 2020

> Oil remains under pressure as coronavirus fears intensify; EIA data eyed. Today, we expect the EIA to report a crude oil inventory build of around 3 mln bpd amid a strong seasonal drop in refinery runs. In our view, the initial price reaction to the report is likely to be bearish (owing to what should be a strong crude stock build), although the negative price effect could be partially offset by draws in the refined product category. Nevertheless, we think that the EIA report could force Brent to revisit its February 10 low of $53.1/bbl, which, in our view, would likely be followed by a moderate bounce. We note that the next strong technical support level is at $52.8/bbl.> Gold retreats yesterday despite persisting pessimism in global markets. In spite of continued risk-off trading in global markets, gold fell 1.5% yesterday. Investors are waiting for further comments from central bank officials following Fed Vice Chairman Richard Clarida's remarks yesterday evening that it is still too early to gauge the scale of the impact from the coronavirus epidemic and how long it will last, and that US monetary policy is in a good place to ensure sustained economic growth. Gold is back on the upswing this morning following warnings about the coronavirus from the US and another reported rise in South Korean infections. In the absence of major developments over the next couple of days, gold could consolidate near $1,650/oz. The highlight on today's macro calendar is US new home sales data for January.OIL REMAINS UNDER PRESSURE AS CORONAVIRUS FEARS INTENSIFY; EIA DATA EYEDAfter rallying almost $2/bbl to $57/bbl during the first half of the day yesterday (but failing to break through the $57.4/bbl resistance level that we noted yesterday), front-month Brent then started to consolidate within the $56-57/bbl range. Some support was coming from an oil conference in Riyadh, where the Saudi energy minister stated that Saudi Arabia and Russia would continue to engage on oil policy and the matter of the coronavirus and its impact on oil demand growth, saying that "everything serious requires being attended to." In our view, this implies a bullish alteration to the current OPEC+ production cut deal at the March 5-6 meeting in Vienna. Here it is also important to note that the IEA's executive director said yesterday that "we certainly see the lowest oil demand growth in the last 10 years and we may need to revise it downwards." The IEA's latest report suggests demand growth of only 0.82 mln bpd y-o-y in 2020 (this is a downward revision by 0.36 mln bpd from the previous estimate). The oil price stability, however, was short-lived, and risk assets started to sell off early in the US session after the US Center for Disease Control said that Americans should begin to prepare for the new coronavirus to spread (after reports this week of new cases in several more countries) and that an outbreak in the US could cause a significant disruption to daily life. Note that US oil demand last year was the world's highest at 20.5 mln bpd, followed by Europe (14.2 mln bpd) and China (13.6 mln bpd). Thus, it comes as no surprise that any risk of US oil demand being disrupted results in an immediate drop in oil prices. Front-month Brent eventually settled at $54.95/bbl, fixing $1.35/bbl below the previous settlement. Overnight, the API reported that US crude stocks rose by 1.3 mln bbl to 444.4 mln bbl last week (the EIA's latest report estimated them at 442.8 mln bbl). The buildup came amid a 0.28 mln bpd decrease in refinery runs and despite a 0.28 mln bpd increase in imports. The refined product data was mixed, showing a 0.07 mln bbl build in gasoline stocks and a 0.7 mln bbl decrease in distillate inventories. The buildup in crude inventories weighed on Brent, which following the release slid by $0.45/bbl to $55/bbl, where it is trading this morning. Investors are currently positioning themselves for the EIA report today (18:30 Moscow time). The Bloomberg consensus expects a 2.6 mln bbl build in crude stocks, a 2 mln bbl decrease in gasoline stocks and a 1.5 mln bbl drop in distillate stocks. We expect a stronger crude inventory build amid a strong seasonal drop in refinery runs. The lower refinery uptake, which is due to seasonal maintenance, should mean lower gasoline production and will very likely result in a draw in gasoline and distillate stocks, although we would expect any draw to be modest given the seasonally subdued demand. In our view, the initial price reaction to the report is likely to be bearish (because of the strong crude stock build), but the negative price effect may be partially offset by draws in the refined product category. We think that the EIA report could even force Brent to revisit its February 10 low of $53.1/bbl, which, in our view, would likely be followed by a moderate bounce. We note that the next strong technical support level is at $52.8/ LD RETREATS YESTERDAY DESPITE PERSISTING PESSIMISM IN GLOBAL MARKETSEven though US Treasuries and most other safe-haven assets very much remain in demand, investors in the gold market have become far less eager to buy. This resulted in a 1.5% drop in gold prices yesterday, which was followed by a brief dip to $1,630/oz this morning when trading kicked off in Asia. In our view, gold's retreat owed to uncertainty over how central banks will respond to the coronavirus epidemic. As we mentioned yesterday, investors expect at least two rate cuts from the Fed this year, while the regulator has yet to signal a change in policy. Fed Vice Chairman Richard Clarida said yesterday that it is still too early to speculate about the scale of the economic effects from the coronavirus and how long they will persist, or about whether they will lead to a significant change in the outlook. This morning, after a brief dip, gold is back on the upswing following warnings about the coronavirus from the US and another reported rise in South Korean infections. It is trading around $1,645/oz as we write. In the absence of major developments over the next couple of days, gold could consolidate near $1,650/oz. The highlight on today's macro calendar is US new home sales data for January (due at 18:00 Moscow time)