Commodities Daily - June 1, 2020

> Oil prices rally with OPEC+ meeting and DM manufacturing PMIs in focus. Apart from OPEC+ news flow, today will see the publication of DM manufacturing PMIs. We believe the US ISM manufacturing PMI for May is likely to come in below consensus (as uncertainty and weak profitability in many industries could result in a lengthy period of caution), showing only a very slight rebound from April. We therefore think Brent today could retrace to $37/bbl before embarking on a sustained upward trend, with $38.7/bbl being the nearest technical resistance mark.> Gold prices advancing amid massive protests in US. Gold prices have climbed to $1,740/oz so far today but may move lower if manufacturing PMIs from around the globe come in ahead of the consensus (investors will be particularly looking out for the prints from the US and Europe). Although investment demand for gold remains high, CFTC data for the open positions of hedge funds shows an increase in short positions for the week ending May 26. OIL PRICES RALLY WITH OPEC+ MEETING AND DM MANUFACTURING PMIS IN FOCUSOn Friday, the Brent July contract traded sideways in a $34.0-35.3/bbl range and expired at $35.33/bbl, $0.04/bbl above the previous settlement. The August contract, which has now become the new front-month contract, surged $3/bbl on Friday afternoon and even briefly broke above $38/bbl, supported by a US stock market rally. This was partly prompted by the US not moving as punitively or as quickly against China as some investors had feared following the US president's remarks on Thursday. The August contract eventually settled at $37.84/bbl, $1.81/bbl above the previous settlement. One bullish factor that helped to push Brent back to $38/bbl was the EIA's 914 report on US oil production in March, which showed a further drop in output from November's record high of 12.87 mln bpd to 12.72 mln bpd. This was the fourth consecutive monthly decrease, this time by 0.03 mln bpd. Another factor providing support was the Baker Hughes report, which indicated yet another sharp drop in the weekly active US rig count (down by 17 units to a new record low of 301). Drillers have been cutting an average of 50 rigs per week since mid-March. Energy Aspects estimates that US production will fall by an average of 1.37 mln bpd this year and by 0.67 mln bpd next year in response to the crash in oil prices and logistical issues. Moreover, forward WTI prices for this year and next are still below $40/bbl, the breakeven level for high-cost and low-volume production wells. Should prices rise too quickly, the supply that has been shut down will start to return, which would undermine the expected strong inventory draws in 2H20.This morning, Brent is hovering below the $38/bbl mark with the looming OPEC+ meeting in focus. One negative factor at play has been a Reuters report on Friday that in May, OPEC delivered only three quarters, or 4.48 mln bpd, of a pledged 6 mln bpd cut. According to Reuters, OPEC pumped 24.77 mln bpd in May, while the IEA in its latest monthly report estimated that OPEC production would need to average 23.73 mln bpd this year to keep supply and demand in balance. The main headline over the weekend was that Algeria (which holds the OPEC presidency this year) has proposed bringing forward the next meeting to June 4 from June 9-10 in order to avoid disturbing the July crude oil allocations to traditional buyers that usually take place around the 10th of every month. Russia reportedly has no objection to the new date. Contradictory headlines have already been swirling around about whether Saudi Arabia and Russia will agree to extend the 10 mln bpd May-June cuts through the year-end or move to phase two from July, which forms the current agreement and involves paring back the production cut to 7.7 mln bpd. We believe a short extension to the 10 mln bpd cut is likely, and we think this could push Brent toward the $40/bbl mark if announced. Apart from OPEC+ news flow, today will see the publication of DM manufacturing PMIs. We believe the US ISM manufacturing PMI for May is likely to come in below consensus (as uncertainty and weak profitability in many industries could result in a lengthy period of caution), showing only a very slight rebound from April. We therefore think Brent today could retrace to $37/bbl before embarking on a sustained upward trend, with $38.7/bbl being the nearest technical resistance LD PRICES ADVANCING AMID MASSIVE PROTESTS IN USThis morning, gold prices have climbed around $10/oz to reach the $1,740/oz mark. This comes amid widespread civil unrest in the US. Curfews have been in imposed in 40 major cities, while in Washington DC more than 60 law enforcement officers have been injured. Unsurprisingly, this has triggered demand for defensive assets. Gold may well advance further if the scale of the protests continues to expand. A secondary driver for gold is rhetoric from the Fed. In comments delivered on Friday, Chairman Jerome Powell touched on the question of negative rates, saying that such a move could harm the financial sector, in particular by reducing margins for banks and damaging lending. Powell also noted that the Fed's balance sheet cannot expand forever, but that at the current moment he didn't see the expansion as posing risks to financial stability. The reaction of the gold market to the comments was neutral, particularly given that ETF demand for gold is already high. In fact, ETFs have now increased purchases of gold for 26 consecutive days and, according to Bloomberg, ETF holdings as of June 1 totaled 100.16 mln oz. Meanwhile, CFTC data showed that the net open long positions of hedge funds dropped over the week ending May 26. Although long positions remain high at around 181k contracts, short positions climbed 31% to 32k contracts. Today will see manufacturing PMIs for May from a number of countries, with the prints from the US and Europe in particular focus. Stronger than expected readings could push gold prices lower today. However, if political risks (related to the US and China and US protests) remain elevated, gold could keep climbing, perhaps even reaching technical resistance at $1,765/oz.