Commodities Daily - January 27, 2020

> Oil tumbles further amid global risk-off trading sparked by virus fears. The coronavirus is expected to peak within a couple of weeks, as it seems to be contagious for around two weeks before symptoms appear and the city of Wuhan (the epicenter) was shut down last week to stop the spread. Until then, further quarantines and restrictive measures are likely to dampen the outlook for oil demand and economic growth in 1Q20. Thus, this week we expect Brent to test its next technical support level of $57.78/bbl, which is the medium-term target price in our new trade idea, amid deteriorating global risk appetite.> Gold prices sharply higher on news of further spread of coronavirus. The main trigger on Friday was an announcement that the Lunar New Year holiday was being extended to February 2. Meanwhile, things seemed to have gotten worse over the weekend: the number of cases has now reached nearly 3,000, while the death count is at 80. Also, cases have now been reported in a number of other countries. Demand for defensive assets remains strong, as the CTFC data released on Friday shows. Further gains in gold are entirely possible - in fact, we think that it will likely test the $1,600/oz level this week.OIL TUMBLES FURTHER AMID GLOBAL RISK-OFF TRADING SPARKED BY VIRUS FEARSAfter a steady descent from $66/bbl, where Brent was trading at the start of last week, the benchmark stabilized around $62/bbl and held there throughout Thursday and during the first half of the day on Friday. One supportive factor during Friday's European trading session was a surprise jump in the Markit eurozone manufacturing PMI to 47.8 in January (versus 46.8 expected and December's 46.3 reading), which inspired hopes that the European manufacturing sector could return to expansion this year thanks to the US-China phase one trade deal, some clarity on the Brexit timeline and expectations that the US will not actually impose tariffs on imports of European cars. Ahead of the US open, however, concerns resurfaced about the potential effect the coronavirus could have on fuel demand, driving Brent to an intraday low of $60.25/bbl. The fears over the epidemic later spread into other markets, triggering risk-off trading around the globe. As a result, major US equity indexes slumped on Friday, with the S&P 500 seeing its biggest one-day drop in over three months. This provided additional headwinds for oil, while safe-haven assets rallied. Friday's Baker Hughes report showed a three-unit increase in the active US oil rig count to 676 (following the strong 14-unit increase a week prior), which exerted further pressure on oil prices. Brent eventually settled at $60.69/bbl, fixing $1/bbl below the previous settlement.Brent has now fallen to around $59/bbl, as the global risk-off trading has intensified amid reports that the virus has now killed 80 people, with more than 2,700 cases confirmed in at least 10 countries. This comes despite the fact that Libya's National Oil Corporation has reported that Libyan oil production dropped to 0.28 mln bpd in the week to January 24, down from 1.2 mln bpd, amid the ongoing blockade of the country's oil transport infrastructure. Saudi Arabia's energy minister, meanwhile, attempted to soothe the market by saying that the kingdom is closely monitoring the impact of the virus on the Chinese and global economy, as well as on oil market fundamentals. He highlighted that all options will be on the table at the OPEC+ meeting on March 5-6 (a ministerial monitoring committee meeting will be held on March 4), including further cuts to output.Trade idea. Technical analysis suggests the next strong support levels for Brent are $57.78/bbl (0% Fibonacci retracement from the recent correction from $65.98/bbl), $56.92/bbl (50% Fibonacci retracement from a long-term daily chart where 0% retracement is a 1Q16 low of $27.1/bbl) and $55.88/bbl (0% Fibonacci retracement from a daily six-month-long chart). The coronavirus is expected to peak within a couple of weeks, as it seems to be contagious for around two weeks before symptoms appear and the city of Wuhan (the epicenter) was shut down last week to stop the spread. Until then, further quarantines and restrictive measures are likely to dampen the outlook for oil demand and economic growth in 1Q20. Thus, this week we expect Brent to test its next support level of $57.78/bbl, which is our medium-term target price ($1.6/bbl from the current level) amid deteriorating global risk appetite. By the time the virus is expected to be contained, Brent will likely be oversold, providing an opportunity to go long either via futures or call LD PRICES SHARPLY HIGHER ON NEWS OF FURTHER SPREAD OF CORONAVIRUSGold prices got a boost on Friday from a mixed batch of US data. The US manufacturing PMI slid to 51.7 (consensus: 52.5), although things looked better in the services sector, where the PMI print came in at 53.2, above the consensus of 53. However, the main driver of gold prices on Friday was the continuing spread of the coronavirus - the particular trigger on Friday was an announcement that the Lunar New Year holiday was being extended to February 2 (it was supposed to end on January 30). Meanwhile, things seemed to have gotten worse over the weekend: the number of cases has now reached nearly 3,000, while the death count is at 80. Cases have now been reported in a number of other countries. Against this backdrop, demand for risk assets - including gold - has been rising. Gold is currently trading at $1,588/oz. Key events in the coming days include the Fed meeting, which gets underway tomorrow. Today also sees several US macro reports (new home sales at18:00 and the Dallas Fed manufacturing activity index at 18:30). It is entirely possible that gold prices will continue climbing, particularly as fears mount that the coronavirus will spread further. We think it likely that gold will test the $1,600/oz level this week. The weekly CFTC data issued on Friday showed that hedge funds are significantly long in gold - net long positions as of the week ending January 21 totaled 259k