Commodities Daily - February 3, 2020

> Oil slides further on coronavirus impact on oil market fundamentals; US manufacturing PMI eyed. Today, investors will eye the January ISM US manufacturing PMI at 18:00. We see the figure slightly exceeding the consensus amid the US-China phase one trade deal. In our view, Brent could test the $55.8/bbl technical support level today (whereas we think any downside this week would be limited to $54.65/bbl) before rebounding on US data. We also think that it would be wise this week to look for an opportunity to enter long positions in Brent following the recent abrupt correction and what should be further headlines pointing to the increasing containment of the virus.> Gold prices volatile as Chinese markets reopen. Today, Chinese markets reopened after holidays that had started back on January 23. Gold initially managed gains to around $1,592/oz, as stock indexes opened sharply lower (the Shanghai Composite fell almost 10%); however, when the PBoC announced major measures to support short-term liquidity in the Chinese banking system, safe-haven demand started to fade, and gold prices began to drop. As of this writing, gold is off $18/oz from where they started this morning. Meanwhile, the mood on the gold market remains optimistic, supported by the latest data on hedge funds' positions in gold, which came out on Friday and showed only a slight drop in net long positions. US and European manufacturing PMIs are expected today. We think gold will have a tough time making gains from current levels today and see it consolidating around $1,575/oz.OIL SLIDES FURTHER ON CORONAVIRUS IMPACT ON OIL MARKET FUNDAMENTALS; US MANUFACTURING PMI EYEDAfter hovering above $59/bbl early on Friday, the expiring Brent contract for March slid further during the day and eventually expired at $58.16/bbl, fixing $0.13/bbl below the previous settlement. Meanwhile, the April contract, which is the new front-month one, shed almost $2.5/bbl on Friday, pressured by a selloff in stock markets. It consolidated near $56/bbl late in the US session and is trading near that level this morning. Providing further headwinds to oil on Friday (amid what was already global risk-off trading) was the EIA's 914 report on US oil production in November, which showed a strong 0.2 mln bpd m-o-m increase to a record high of 12.9 mln bpd. A rare positive for oil on Friday came from Russian Energy Minister Alexander Novak, who expressed a willingness to shift the OPEC+ meeting from March to February in order to more quickly address the decreased demand globally resulting from the coronavirus. The OPEC+ technical committee is due to meet on February 4-5 to discuss the virus's impact. Reuters reported on Friday that OPEC production declined 0.64 mln bpd m-o-m in January to 28.35 mln bpd (Bloomberg will release its estimate today), way below the decreases that the IEA, OPEC and EIA (28.88 mln bpd, 29.47 mln bpd and 29.44 mln bpd, respectively) see as sufficient to keep the market in balance this year (although these figures do not account for the effect of the coronavirus). In our view, the virus will likely shave 0.3 mln bpd from global oil demand (y-o-y growth would turn out slightly below 1 mln bpd in 2020). This would imply an overall inventory drawdown this year, but only if OPEC+ extends the deal for the whole of 2020, thereby maintaining the January production level for the full year. It is also important to note that Russian oil and gas condensate output was up 0.02 mln bpd m-o-m to 11.28 mln bpd in January, according to the Energy Ministry. No information is available on the breakdown of condensate and oil production (Russia's 1Q20 target under the current OPEC+ deal, which only includes crude oil, is 11.12 mln bpd).This morning, investors are digesting recent reports of a 3 mln bpd drop in China's oil demand (the largest shock since the 2008-09 financial crisis), in light of the 14 mln bpd in total demand. Latin American oil shipments to China were stopped last week, while West African shipments were also down. This comes as China's Sinopec (Asia's largest refiner) has already cut throughput this month by around 0.6 mln bpd to offset fuel demand losses and buildup in refined product stocks. Meanwhile, the recent flattening of the Brent futures curve from steep backwardation (the April-May calendar spread fell from $0.7/bbl on January 24 to $0.1/bbl currently) remains one of the key aspects of the coronavirus's impact on oil market fundamentals. Today, investors will eye the January ISM US manufacturing PMI at 18:00 (consensus is 48.5; December figure was 47.8). We see the figure slightly exceeding the consensus amid the US-China phase one trade deal; however, we also see factory recession persisting (PMI remaining below 50) for 1Q20 given the production halt of the Boeing 737 Max. Another reason for cautious optimism (in addition to what we expect to be an upbeat ISM manufacturing PMI) has been what seems to be progress in the battle with the coronavirus. The number of infected patients who have recovered and been released from the hospital has nearly reached 500, exceeding the number of deaths. Also, most of the confirmed cases continue to be in mainland China - mostly in the quarantined Hubei province - while the rise in cases outside of mainland China has slowed. In our view, Brent could test the $55.8/bbl technical support level today (whereas we think any downside this week would be limited to $54.65/bbl) before rebounding on US data. We also think that it would be wise this week to look for an opportunity to enter long positions in Brent following the recent abrupt correction and what should be further headlines pointing to the increasing containment of the LD PRICES VOLATILE AS CHINESE MARKETS REOPEN.On Friday, investors were weighing the reaction of Chinese markets when they would come back from holiday today and expected a selloff. This caused safe-haven asset prices to climb starting later in the day. Gold was not an exception, closing higher, and it approached the $1,590/oz mark during the day. This morning, the gold market has been volatile. Prices strengthened and were around $1,592/oz, as the Shanghai Composite index opened down 10% and the yuan weakened above the 7.0 against the dollar. But when the PBoC announced major measures to support short-term liquidity in the Chinese banking system (cutting repo rates and injecting $174 bln into banks), safe-haven demand started to fade, and prices began to drop. As of this writing, gold is off $18/oz from where it started this morning. Nevertheless, the mood on the gold market remains optimistic, supported by the latest data on hedge funds' positions in gold, which came out on Friday. In the week ending January 28, when the coronavirus outbreak had already been in the news, there was only a slight drop in net long positions (to 257.6k contracts), while the number of long contracts remained high at around 290k. US and European manufacturing PMIs are expected today. We think gold will have a tough time making gains from current levels today and see it consolidating around $1,575/