Commodities Daily - January 9, 2020

> Oil slides on signs of US-Iran de-escalation and bearish EIA report. This morning, Brent has continued to fluctuate within the $65-66/bbl range. Four Fed leaders are scheduled to deliver public remarks today, while tomorrow's agenda features the monthly US jobs report, which usually generates some market volatility. Following the correction in the wake of the EIA data, we believe oil prices are poised to gradually recover amid a rebound in risk appetite (stock markets are rallying this morning) and a very low likelihood that the US and Iran will begin to explore diplomatic solutions (we note that it was recently reported that two rockets had struck Baghdad's heavily fortified Green Zone).> Gold prices approach $1,610/oz mark yesterday before plummeting $50/oz amid de-escalation. Gold saw significant intraday volatility yesterday. A further escalation of the conflict seemed likely when Iran struck US bases in Iraq with missiles - this sent gold prices $35/oz higher. However, in a speech to the nation Donald Trump talked about further sanctions but stated that further military moves would not be forthcoming. Gold plummeted by more than $50/oz as a result and is trading around $1,550/oz this morning. We recommend investors take profit at this level and leave our 1Q20 average price forecast unchanged at $1,525/oz. OIL SLIDES ON SIGNS OF US-IRAN DE-ESCALATION AND BEARISH EIA REPORTAfter surging around $3/bbl to $71/bbl early yesterday following an Iranian missile attack targeting US forces stationed in Iraq (in retaliation for the US drone strike that killed IRGC General Qasem Soleimani last week), front-month Brent began to ease despite the bullish API crude oil inventory data published overnight. Brent slid back to $68/bbl ahead of the weekly EIA inventory update, as it was reported that the Iranian strikes had not resulted in any US casualties (this leads us to think that Tehran's goal is to retaliate in a way that will not trigger US strikes on Iran) or oil supply losses. Moreover, there were statements from both sides signaling de-escalation. The Iranian foreign minister stressed that Iran would like to avoid further escalation, while the country's defense minister indicated that Tehran's next steps would depend on the US response. Furthermore, later in the day US President Donald Trump said, "The fact that we have this great military and equipment, however, does not mean we have to use it. We do not want to use it." Trump's comment seemed to suggest that the US is also eager to defuse the situation. Despite this, we want to highlight that there is still a risk that Iran will continue to test US red lines and vice versa. For example, Iran could attempt to block the Strait of Hormuz, a major oil shipping route. We note that several shippers have already started to avoid the strait as a precautionary measure and that freight rates are pushing higher.The EIA's stockpile data yesterday showed a 1.16 mln bbl increase in US crude stocks to 431 mln bbl, which defied the Bloomberg consensus of a 3.25 mln bbl draw and the API's reported 5.9 mln bbl decrease. The buildup came amid a 0.38 mln bpd increase in imports to 6.73 mln bpd, a 1.4 mln bpd decrease in exports to 3 mln bpd and a 0.38 mln bpd drop in refinery inputs to 16.9 mln bpd. US crude production was flat at 12.9 mln bpd. The refined product data was also bearish, with total petroleum stocks (including oil but excluding strategic petroleum reserves) up by a strong 14.7 mln bbl. Gasoline stocks grew a massive 9.1 mln bbl to 251.6 mln bbl, while distillate stocks were up a very strong 5.3 mln bbl to 139 mln bbl. Following the report, Brent lost almost another $3/bbl and eventually settled at $65.44/bbl, fixing $2.83/bbl below the previous settlement. This morning, Brent has continued to fluctuate within the $65-66/bbl range. Four Fed leaders are scheduled to deliver public remarks today, while tomorrow's agenda features the monthly US jobs report, which usually generates some market volatility. Following the correction in the wake of the EIA data, we believe oil prices are poised to gradually recover amid a rebound in risk appetite (stock markets are rallying this morning) and a very low likelihood that the US and Iran will begin to explore diplomatic solutions (we note that it was recently reported that two rockets had struck Baghdad's heavily fortified Green Zone). We also agree with the view expressed by Energy Aspects yesterday that Iran's "Supreme Leader may calculate that he needs a much stronger hand, both in terms of nuclear capacity, as well as via hard power projection in the region, before engaging in any diplomacy." LD PRICES APPROACH $1,610/OZ MARK YESTERDAY BEFORE PLUMMETING $50/OZ AMID DE-ESCALATIONGold prices are up around 2% so far this year. The main events for the gold market have unfolded since the killing of Iranian military leader Qasem Soleimani on January 3. This had initially propelled gold higher by some $35/oz. With an escalation still seemingly likely, gold prices remained elevated at around the $1,550/oz mark as this week got underway. Yesterday, meanwhile, saw high intraday volatility in gold. Following reports overnight that Iran had struck US bases in Iraq, gold rose to as high as $1,610/oz yesterday morning. However, gold began paring back the losses during Trump's address to the nation in which he talked about new sanctions against Iran but stated that further military action would not be forthcoming. This morning, gold is trading at fairly high levels of around $1,550/oz, which we think represents a good level for profit taking. Despite the high geopolitical risks, we keep our forecast for gold averaging $1,525/oz in 1Q20. Meanwhile, it bears noting that speculative demand for gold remains high. The most recent CFTC data (as of December 31) shows a significant volume of long positions - hedge funds had more than 286k long positions open, which exceeds short positions by more than 12-fold. There are no major macro releases scheduled today, although four Fed officials are scheduled to