Commodities Daily - January 23, 2020

> Oil slumps on bearish API data and demand-side fears as virus epidemic develops; EIA report eyed. We expect the EIA today to report a 2-3 mln bbl rise in US oil inventories amid a seasonal drop in refinery runs. The lower refinery uptake is due to seasonal maintenance works and is unlikely to result in a drawdown of refined product inventories given subdued demand. We therefore think the EIA report is likely to push Brent even lower, with the downside limited to the next technical support level at $60.9/bbl.> Gold prices stable. Gold traded sideways in a range of $1,550-1,560/oz yesterday, finishing the day virtually flat. Investors eagerly await the publication of the statement from today's ECB meeting (at 15:45 Moscow time), which will be followed up by a press conference with Christine Lagarde. The highlight on today's macro calendar is US weekly jobless claims (due at 16:30 Moscow time). We believe gold is likely to hold above $1,550/oz today amid still-dovish ECB rhetoric and elevated demand for safe-haven assets. OIL SLUMPS ON BEARISH API DATA AND DEMAND-SIDE FEARS AS VIRUS EPIDEMIC DEVELOPS; EIA REPORT EYEDFront-month Brent began yesterday hovering below $64.5/bbl before gradually sliding toward $64/bbl during European trading hours. The downward momentum intensified in the buildup to the Wall Street session, with Brent breaking below the strong technical support at $63.95/bbl and tumbling to as low as $62.6/bbl. It eventually settled at $63.21/bbl, $1.39/bbl below the previous settlement. The coronavirus and resulting demand-side fears remain the key factors behind this week's oil price correction. The virus has so far led to the deaths of 17 people, with nearly 600 people confirmed infected. Authorities in the Chinese city of Wuhan, which is at the epicenter of the virus, have shut transport networks and urged residents not to leave to prevent the contagion spreading. This is bound to have negative implications for oil demand and economic growth in general. Given that global economic growth is already weak, the coronavirus could have an even more negative impact on Chinese GDP. Overnight, the API reported that US crude stocks rose 1.6 mln bbl to 433 mln bbl last week (the EIA's latest report estimated them at 428.5 mln bbl). The buildup came amid a 0.02 mln bpd decrease in refinery runs and despite a 0.02 mln bpd decrease in imports. The refined product data remained strongly bearish, this time showing a 4.5 mln bbl build in gasoline stocks and a 3.5 mln bbl increase in distillate inventories. The buildup across all categories weighed on Brent, which this morning is retreating closer to the $62/bbl mark.Ahead of today's EIA inventory data (19:00 Moscow time), investors will digest US jobless claims, the outcome to the ECB meeting and its follow-up statement. The Bloomberg consensus for the inventory data is for a 0.8 mln bbl build in crude inventories, a 2.8 mln bbl increase in gasoline stocks and a 2.25 mln bbl build in distillate stockpiles. We expect a stronger oil inventory build of 2-3 mln bbl amid a seasonal drop in refinery runs. The lower refinery uptake is due to seasonal maintenance works (and thus means lower motor fuel production) and is unlikely to result in a drawdown of refined product inventories at this stage given subdued demand. Refinery inputs would need to drop another 1 mln bpd (unlikely until mid-February) from the current 17 mln bpd for motor fuel stocks to start drawing consistently. We therefore think the EIA report is likely to push Brent even lower, with the downside limited to the next technical support level at $60.9/ LD PRICES STABLEYesterday was rather quiet in global markets and the gold market in particular. Gold traded sideways in a range of $1,550-1,560/oz. A weak Chicago Fed index reading for December (negative 0.35, down from positive 0.41 in November) negated the effect of rather strong US existing home sales in December (an annual rate of 5.54 mln, versus the consensus of 5.43 mln). As a result, gold closed the day virtually flat. This morning, the mood in global markets turned sour again amid growing concerns over the coronavirus in China. Investors eagerly await the publication of the statement from today's ECB meeting (at 15:45 Moscow time), which will be followed up by a press conference with Christine Lagarde. Our FX analysts expect the regulator to announce a shift in strategy and perhaps change its goal for inflation to a symmetric target (the aim is currently to keep inflation below but close to 2%). The ECB's refinancing rate and the parameters of its QE program are expected to be left unchanged. For investors, it is important that the ECB maintain a dovish tone, so Lagarde's comments and guidance, if dovish, could provide support to gold, which we expect to hold above $1,550/oz today. The highlight on today's macro calendar is US weekly jobless claims (due at 16:30 Moscow time)