Commodities Daily - January 29, 2020

> Oil rebounds on improving risk sentiment and upbeat API data; EIA report eyed. 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 (and thus lower gasoline production) and is unlikely to result in a drawdown of refined product inventories given the subdued demand. We therefore think the EIA report is likely to weigh on Brent later today, although the downside should be limited to the next technical support level at $58.9/bbl.> Gold slides as coronavirus panic ebbs; Fed meeting on the radar. Investors will get a chance later today to shift their focus from the coronavirus to the Fed statement (due at 22:00 Moscow time) and the press conference that follows. If the Fed, as we expect, decides to support growth by injecting vast amounts of liquidity into the system, this would this would support risk sentiment and in turn pressure gold prices. We would thus expect the yellow metal to retrace to $1,555/oz late this evening. However, we note that a possible revival of global risk-off sentiment on new virus-related headlines could provide support to gold at any point today.OIL REBOUNDS ON IMPROVING RISK SENTIMENT AND UPBEAT API DATA; EIA REPORT EYEDYesterday, for the second consecutive session Brent resisted breaking below $58.5/bbl and then began to generate positive momentum. Amid a strong rebound in equities, Brent was on track to reach $60/bbl during the US session. However, downbeat data on new orders for key US-made capital goods (dropped by the most in eight months in December) implies business spending has remained weak despite three Fed rate cuts last year. But this had only a temporary negative impact on oil prices - Brent fell $0.5/bbl following the release. It eventually settled at $59.51/bbl, fixing $0.19/bbl above the previous settlement. It seems that markets are beginning to adjust to the upbeat comments suggesting that China will soon be able to contain the virus. The oil market is drawing additional support from OPEC having pledged readiness to offset any demand for oil that is lost due to the virus. Yesterday, Reuters reported that OPEC aims to extend the output cut deal at least until June and that deeper reductions are possible. Meanwhile, the total number of deaths from the virus rose by 26 yesterday to 132, while the number of confirmed cases climbed 1,459 to 5,974. We think it premature to start picking up oil futures, as we think another wave of risk-off will likely be forthcoming during which Brent may test new lows. This would provide a better entry point. As an example of something that could trigger this, CNBC yesterday reported that the White House had told airline executives that it was considering suspending air traffic with China, which would certainly deliver a blow to oil prices.Overnight, the API reported that US crude stocks were down 4.3 mln bbl to 429 mln bbl last week (the EIA's latest report estimated them at 428.1 mln bbl). The drawdown came amid a 0.56 mln bpd decrease in imports and despite a 0.056 mln bpd decrease in refinery runs. The refined product data remained bearish, this time showing a 3.3 mln bbl build in gasoline stocks and a small 0.14 mln bbl decrease in distillate inventories. The drawdown in crude supported Brent, which as of this writing has managed to break above $60/bbl. Investors are now positioning themselves for today's EIA inventory report (18:30 Moscow time). The Bloomberg consensus is for a 1.29 mln bbl crude build, a 1.58 mln bbl increase in gasoline stocks and a 0.95 mln bbl decrease in distillate stocks. 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 (and thus lower gasoline production) and is unlikely to result in a drawdown of refined product inventories given the subdued demand. We therefore think the EIA report is likely to weigh on Brent later today, although the downside should be limited to the next technical support level at $58.9/ LD SLIDES AS CORONAVIRUS PANIC EBBS; FED MEETING ON THE RADARAfter trading around $1,580/oz during the first half of the day yesterday, gold started to slide toward $1,570/oz during US trading. It then fell to $1,565/oz this morning. As we noted in the oil section above, the improvement in risk sentiment that triggered this correction was largely attributed to an ease in fears over the coronavirus, though there were no clear signs of an improvement in the situation. One possible source of encouragement may have been comments made during a meeting with Chinese President Xi Jinping by the head of the WHO, who expressed confidence in China's ability to control and contain the virus outbreak. In our view, it is too early to give up on safe-haven exposure. We would only recommend doing so once it is proven that the outbreak has been contained and the travel restrictions are lifted. The fact that the White House is considering suspending US air traffic with China (as was reported by CNBC) and the still-climbing number of confirmed cases (up 1,459 d-o-d to 5,974 yesterday) and deaths (up 26 d-o-d to 132) suggest that the virus is far from contained. Today, investors will get a chance to shift their focus from the virus to the Fed statement (due at 22:00 Moscow time) and the press conference that follows. Our FX team expects rates to be left unchanged but for the Fed to extend its T-bill purchases into 3Q20 (it has been buying T-bills at a rate of $60 bln per month since last autumn). This should inject several hundreds of billions of dollars into the system, which should push 3m rates lower by about 10 bps and lead to a weakening of the dollar. We believe that the rise in risk sentiment, notwithstanding the dollar weakness, would weigh strongly on gold, causing it to retrace to $1,555/oz. However, we note that a possible revival of global risk-off sentiment on new virus-related headlines could provide support to gold at any point