Commodities Daily - March 10, 2020

> Oil prices attempting to stabilize after crashing on Monday. Today, investors will eye the EIA's Short-Term Energy Outlook, which will provide updated forecasts for US shale output growth this year. There are currently very few factors we see that could support prices, with a potential stock market rebound being one of them. We think that Brent is likely to test technical support at $34.3/bbl later today.> Gold prices surprisingly calm amid high volatility in commodity markets. Early in the day yesterday, gold tested the $1,700/oz level, but ended up closing only 0.4% higher at $1,680/oz. This morning, it has been under pressure and is quoted at $1,665/oz as we write. US President Trump will discuss fiscal measures to support the economy with Congressional leaders today and will also hold a press conference. In addition, investors are expecting major support to be announced by the ECB and Fed this week and next. We see gold moving toward $1,675/oz today.OIL PRICES ATTEMPTING TO STABILIZE AFTER CRASHING ON MONDAYAfter Brent plummeted $5/bbl to $45/bbl on Friday following the collapse in the OPEC+ negotiations with no deal, investors' attention turned to the release of Saudi Arabia's April selling prices for insight on the kingdom's strategy. Since the current OPEC+ deal expires at end-March, at the time it was assumed that there would still be three weeks to reach a compromise. On Saturday, however, Saudi Arabia shocked markets by slashing its April prices for all destinations (by $7-8/bbl for Europe and the US and $4-6/bbl for Asia), sending a clear signal that it will boost exports next month to well above 10 mln bpd (the IEA's estimates yesterday, the latest we have, showed them at 9.65 mln bpd in February). Saudi Arabia also said it could raise output to as high as 12 mln bpd if needed. We think this would be challenging, though 11.5 mln bpd is certainly reachable. All this means a return to the "pump at will" strategy for producers. This same strategy sent oil prices freefalling by $85/bbl in 2014-16 (despite strong oil demand growth), pushing Brent below $30/bbl in early 2016. The outcome is expected to be worse this time, compounded by the coronavirus, which has dented oil demand growth. Brent plunged toward $31/bbl at the open yesterday and then fluctuated within a very wide $31-37.3/bbl range.In our view, low oil prices will not force Russia back to the negotiating table. Moreover, any future pact would have very low credibility with investors. A stalemate between Russia and Saudi Arabia could last for years (the G20 meeting in September will be a test), as both can withstand a prolonged low price environment despite all the hardships. Under the new paradigm, the US shale oil breakeven price (WTI near $40/bbl) should effectively become a ceiling for oil, as any swift rebound in shale production would force prices back down. Brent slumped from $115/bbl to $60/bbl in 2014, and the low oil prices resulted in whopping demand growth of 2.2 mln bpd the next year. Despite this extraordinary support, Brent continued to slide for most of 2015 and eventually broke below $30/bbl in early 2016. OPEC crude output surged by 1.5 mln bpd in 2015, while US output grew 0.65 mln bpd despite the lower prices (even below breakeven for shale), with total global supply growth rising 2.5 mln bpd. This year is likely to see a very similar supply increase, but without any demand growth (as per the IEA's recent base scenario), which could result in the fastest oil inventory growth in history. The low oil prices will not boost oil demand as long as actions to counter the coronavirus cap fuel consumption growth.OPEC's efforts to see off surging US shale output in 2014-16 resulted in a just 1.1 mln bpd output decline that began in December 2015 and lasted until September 2016. According to Energy Aspects, most US shale producers have hedged 75-90% of 2020 production, though the remainder remains exposed to falling oil prices. In addition, the largest US oil companies, Exxon Mobil and Chevron, control many shale wells and have the balance sheets to withstand lower prices. We therefore do not expect US oil production to decline in 2020, but to stagnate. Today, investors will eye the EIA's Short-Term Energy Outlook, which will provide updated forecasts for US shale output growth this year. There are very few factors we see that could support prices, with a potential stock market rebound being one of them. We think that Brent is likely to test technical support at $34.3/bbl later LD PRICES SURPRISINGLY CALM AMID HIGH VOLATILITY IN COMMODITY MARKETSThe tumble in oil prices drove a flight to safety yesterday, with US Treasury prices climbing 7% across the curve and the yield on the 10y reaching a new low (0.32% at one point). The gold price, however, showed only a moderate reaction. Early in the day, it tested the $1,700/oz level, but ended up closing only 0.4% higher at $1,680/oz. This morning, it has been under pressure and is quoted at $1,665/oz as we write. Yesterday, US government officials tried to encourage markets with talk of new fiscal measures, which would usually be negative for gold. President Trump held a meeting with his economic advisors at which they discussed a cut to the payroll tax. Today, he will discuss fiscal measures to support the economy with Congressional leaders. Meanwhile, investor demand for gold has showed its first signs of weakness, with hedge fund long positions having started to decline. According to CFTC data for the week ending March 3, there were 294k contracts with open long positions in gold, down 6.3% from the previous week. Against this backdrop, the correlation between gold prices and real yields on US Treasuries has weakened - and despite the latter falling, we do not expect a major rally in gold. Support for gold may come next week, as markets are pricing in a swift 75 bp cut to interest rates at the Fed meeting on March 17-18. This Thursday, the ECB will make a rate decision, possibly cutting by 10 bps. We see gold moving toward $1,675/oz