Commodities Daily - February 4, 2020

> Oil slides further despite upbeat US manufacturing data; deeper OPEC+ cuts could provide tailwinds. We note that most of the support for oil prices from any OPEC action - whether it be to extend the current deal through June or to deepen cuts - would most likely come during 3Q20, when demand will be high. Today, investors will be following Donald Trump's State of the Union address to see if he will announce a delay in the implementation of the trade deal due to the coronavirus outbreak. Given the early signs of progress in containing the outbreak, we think that Brent is unlikely to drop to its next technical support level of $52.7/bbl and is more likely to head toward resistance at $55.8/bbl.> Gold holding around $1,575/oz area despite fresh support from China. This morning, China has announced more measures to stabilize the local market, offering an additional $57 bln in liquidity and putting the official yuan fixing at below 7 to the dollar. This has buoyed demand for risk assets and has pushed gold prices down to the $1,570/oz area. Today, markets will be watching out for US durable and factory goods orders and also Donald Trump's State of the Union address to Congress. Any negative rhetoric from Trump - particularly about China's commitments under the phase one trade deal or critical comments about Fed policy - could push gold prices higher, possibly to the $1,580/oz mark.OIL SLIDES FURTHER DESPITE UPBEAT US MANUFACTURING DATA; DEEPER OPEC+ CUTS COULD PROVIDE TAILWINDSFront-month Brent started the week trading steadily around the $56/bbl mark, but in the lead-up to the Wall Street session it began to slip. It shed about $1.2/bbl to reach around $55.5/bbl ahead of the release of the January US manufacturing PMI. The factory activity gauge provided a pleasant surprise, as it rose to 50.9 (the highest since July and well above the consensus of 48.5) from an upwardly revised 47.8 in December. This meant that the manufacturing sector (some 11% of the US economy) escaped the contraction zone for the first time in five months, buoyed by a rise in the forward-looking new orders sub-index to 52.0 in January (the highest since May, up from a revised 47.6 in December). This implies that the US-China trade deal did in fact have a strong impact on business investment, which probably needs to rebound for the US to prolong its now 11-year economic expansion, especially given the recent signs of fatigue among US consumers. Following the release, Brent rallied $0.7/bbl. However, this did not last long, and the benchmark went on to hit multi-month lows late in the US session. The likely reason for this is that it soon began to sink in that the survey was conducted prior to the coronavirus outbreak, which has seriously disrupted supply chains, especially for electronics producers. Furthermore, many fear that the sector could fall back into recession territory after Boeing's decision to halt production of the 737 Max (its best-selling plane) in January, which some estimate could shave as much as 0.5 pp off US GDP growth in 1Q20. Headwinds for oil late yesterday also came from reports saying that the coronavirus had caused a sharp drop in Chinese demand for oil and that China's independent refiners were scaling back their operations due to weak fuel sales. However, we think that China's crude oil imports are unlikely to fall in line with the decline in consumption, as the currently low prices should encourage China to purchase crude for storage (according to Reuters, China pumped around 0.88 mln bpd into storage in 2019). Brent eventually settled at $54.45/bbl yesterday, fixing $2.17/bbl below the previous settlement. During trading in Asia this morning, Brent rose $1/bbl to $55/bbl on hopes of deeper cuts by OPEC+, after industry sources told Reuters that a reduction of as much as 0.5 mln bpd was being considered. WSJ also reported that Saudi Arabia may be willing to cut by up to 1 mln bpd to support the market. The OPEC+ Joint Technical Committee is meeting today and tomorrow in Vienna to assess the impact of the virus on demand. It is likely to make price-supportive recommendations that could be disclosed later this week. We think that an extra 0.5 mln bpd cut would be sufficient to halt the ongoing oil price correction and could even generate a very moderate uptrend given how weak sentiment has been. We note, however, that most of the support for oil prices from any OPEC action - whether it be to extend the current deal through June or to deepen cuts - would most likely come during 3Q20, when demand will be high. Today, investors will be following Donald Trump's State of the Union address to see if he will announce a delay in the implementation of the trade deal due to the virus. Meanwhile, it seems progress is being made containing the outbreak. More and more people are being released from treatment daily, while the rise in the number of infected or suspected to be infected is slowing. Thus, in our view, Brent is unlikely to drop to its next technical support level of $52.7/bbl and is more likely to head toward resistance at $55.8/ LD HOLDING AROUND $1,575/OZ AREA DESPITE FRESH SUPPORT FROM CHINAVolatility was high in the gold market yesterday. Early in the day, the PBoC's measures to support markets pushed gold prices down by $18/oz from a high of $1,592/oz. Later on when the upbeat ISM manufacturing report was released in the US (50.9 versus the consensus of 48.5, while the ISM new orders print climbed to 52, above the 47.7 expected), gold prices shed another $4/bbl. However, after that gold prices began recovering and consolidated around the $1,575/oz level, before closing at $1,577/oz, a decline of 0.8% on the day. This morning, China has announced more measures to stabilize the local market, offering an additional $57 bln in liquidity and putting the official yuan fixing at below 7 to the dollar. This has buoyed demand for risk assets and has pushed gold prices down to the $1,570/oz area. Today, markets will be watching out for US durable and factory goods orders and also Donald Trump's State of the Union address to Congress. Any negative rhetoric from Trump - particularly about China's commitments under the phase one trade deal or critical comments about Fed policy - could push gold prices higher, possibly to the $1,580/oz