Commodities Daily - January 20, 2020

> Oil gains on output losses in Libya and Iraq. In our view, the force majeure in Libya could last for weeks, as the leader of eastern Libya, Khalifa Haftar, is likely to continue blocking oil exports to gain leverage in the forthcoming meetings over economic reforms in Libya (to be held under international supervision) with western Libya (backed by the UN and EU). Given the latest supply disruptions and the currently healthy risk appetite, we think that Brent could attempt to break through resistance at $66.7/bbl and, if successful, move on to the next resistance level of $67.65/bbl.> Gold prices holding at around $1,560/oz despite strong US macro data on Friday. This week, meanwhile, should be quiet in terms of Fed commentary given that the blackout period ahead of the January 28-29 meeting has begun. The consensus is that the Fed will leave rates unchanged. We expect gold prices to remain high given the high number of open long positions. There will be no trading in the US today due to Martin Luther King day. Among key upcoming events we would note the Davos forum (starts tomorrow) and data on Russian gold holdings (today at 16:00 Moscow time).OIL GAINS ON OUTPUT LOSSES IN LIBYA AND IRAQOn Friday, front-month Brent fluctuated within a $64.5-65.0/bbl range. During the US session, it eased into the lower part of this corridor, partly due to data showing a 0.3% drop in US industrial output in December (a 0.2% decrease had been expected) alongside a downward revision to the November growth figure from 1.1% to 0.8%. We note, however, that manufacturing output (manufacturing makes up about 11% of the US economy) rose 0.2% in December (defying the consensus of a 0.1% decrease, and after the 1% increase in November), indicating stabilization in the sector, which has been hit hard by the now 18-month-long trade war between the US and China. Friday's Baker Hughes report showed a strong 14-unit w-o-w increase in the active US oil rig count to 673, which also provided headwinds for oil prices. Brent eventually settled at $64.85/bbl, fixing $0.23/bbl above the previous settlement.At the very start of trading this week, front-month Brent briefly touched the $66/bbl mark. As we write, it is consolidating within the $65.5-66.0/bbl range. The positive momentum has come on the back of oil supply losses over the weekend in Libya and Iraq. Ongoing protests in Iraq against government corruption and poor services led to access to the Al-Ahdab field being blocked, halting 0.07 mln bpd of production. The 0.05 mln bpd Badra field is at risk of being closed down as well. In Libya, the supply losses could soon turn out to be as high as 1 mln bpd. Over the weekend, forces loyal to the commander of rebel forces in Libya's east, Khalifa Haftar, blocked off eastern oil ports as well as a pipeline that links two major oilfields to export infrastructure. According to OPEC's latest report, Libya produced 1.14 mln bpd of oil in December. We note that this situation developed while a Libya peace summit was being held in Berlin. Following the summit, US Secretary of State Mike Pompeo expressed hope that Libyan oil facilities would reopen as a result of the talks. In our view, the force majeure in Libya could last for weeks, as Haftar is likely to continue blocking oil exports to gain leverage in the forthcoming meetings over economic reforms in Libya (to be held under international supervision) with western Libya (backed by the UN and EU). We note that the oil revenue split between the two sides (now in favor of western Libya by a large margin) will likely be the focal point of the upcoming talks, which we believe are likely to determine the future of Libyan oil flows. Given the latest supply disruptions and the currently healthy risk appetite, we think that Brent could attempt to break through resistance at $66.7/bbl and, if successful, move on to the next resistance level of $67.65/ LD PRICES HOLDING AT AROUND $1,560/OZ DESPITE STRONG US MACRO DATA ON FRIDAYUS macro data turned out to be the key event for markets on Friday. Most eye-catching was the data on housing starts, which surged 16.9% in December, versus expectations of just 1.1% growth. Building permits, meanwhile, declined 3.9% m-o-m, which was worse than the 1.5% decline expected by the consensus. Industrial production declined 0.3%, although the manufacturing sector registered a modest 0.2% gain. The data, however, had only a moderate effect on gold prices - gold dropped $5/oz following the release but recovered soon thereafter. This morning, gold is continuing to trade above the $1,560/oz mark. Statements by Fed officials last week did not have much of an effect on the market. Philadelphia Fed President Patrick Harker, for example, noted that inflation is moving toward the 2% target. This week, meanwhile, should be quiet in terms of Fed commentary given that the blackout period ahead of the January 28-29 meeting has begun. The consensus is that the Fed will leave rates unchanged. We expect gold prices to remain high given the high number of open long positions held by hedge funds, as shown by CFTC data. The data published on Friday for the week ending January 14 showed that hedge funds continued to have heavy long positioning in gold - 262k net long contracts versus just 28k shorts. There will be no trading in the US today due to Martin Luther King day. Among key upcoming events we would note the Davos forum (starts tomorrow) and data on Russian gold holdings (today at 16:00 Moscow time)