Commodities Daily - March 11, 2020

> Oil gained on hopes of US shale output decrease, monetary and fiscal stimulus; ample oil market data releases eyed. We expect the EIA to report a strong crude inventory build of 7-8 mln bbl given seasonally subdued refinery runs and a w-o-w drop in exports. We think that Brent under the current market conditions has exhausted its upside (we note that technical upside is at $40.0-41.4/bbl) and expect it to slide toward the $34.2/bbl technical support level later this week. Today, updated market outlooks by the OPEC Secretariat and EIA are due. A downbeat statement by Saudi Aramco this morning that it will boost total capacity to a whopping 13 mln bpd is likely to weigh on prices further today.> Gold prices recovering after yesterday's 1.8% drop. This morning, the BoE announced an emergency 0.5 pp cut to its key policy rate, to 0.25%, to cushion the economy from the shock of the coronavirus. Investors are now waiting for the ECB to act at its meeting tomorrow. The policy easing by the world's leading central banks has been supportive for gold prices, as has persisting demand for physical gold from ETFs, which added to their holdings yesterday. Today's slate of data includes February CPI from the US. We expect gold to continue consolidating around $1,660/oz.> We recommend hedging against risks of rise in copper prices in rubles over next 3-6 months. Copper prices have been under pressure since the end of January, having lost almost 12% after the start of the coronavirus outbreak in China. However, taking into account Chinese demand potentially rebounding and risks to supply from Chile, we think the global refined copper market could return to balance in 3Q-4Q20. Meanwhile, the ruble has recently depreciated almost 5% and has potential to weaken further, which supports our target forecast for copper price of R450k/tonne by end-2020.OIL GAINS ON HOPES OF US SHALE OUTPUT DECREASE, MONETARY AND FISCAL STIMULUS; OIL MARKET DATA RELEASES EYED TODAYAfter trading in a $31-37/bbl range on Monday, Brent price volatility decreased yesterday, as it traded sideways in a $35.2-38.1/bbl corridor. Since plummeting to $31/bbl, it has rebounded thanks to monetary and fiscal stimulus measures announced globally that have pushed stock markets higher. Reports that large US shale producers (Marathon Oil and Occidental Petroleum) are already slashing spending (which in our view would result in a significant output reduction next year) have also supported prices. The current rally, however, does not mean that prices should return to previous levels anytime soon; in our view, it is no more than a temporary upswing in the newly established Brent $25-45/bbl range, which should remain in place until oil output begins to be regulated again. The latest exchange of comments between Russian and Saudi officials, meanwhile, does not suggest a truce is on the radar, with the Saudi energy minister saying that he did not see a reason to hold an OPEC+ meeting in May-June without agreement on measures to deal with the impact of the coronavirus on oil demand and prices. The Saudi Aramco CEO said the company would increase output in April to 12.3 mln bpd, while Moscow has said it might boost output 0.3-0.5 mln bpd. Russia's energy minister will meet with the country's oil companies today to discuss the future of OPEC+, which we think could cement Russia's current position.Overnight, the API reported that US crude stocks had risen by 6.4 mln bbl to 453.0 mln bbl last week (the EIA's latest report estimated them at 444.1 mln bbl). The build came amid a 0.09 mln bpd decrease in refinery runs and despite a 0.05 mln bpd decrease in imports. The refined product data was bullish, showing a 3.1 mln bbl draw in gasoline stocks and a 4.7 mln bbl decrease in distillate inventories. Investors are positioning themselves for the EIA report today (17:30 Moscow time). The Bloomberg consensus suggests a 1.7 mln bbl build in crude stocks, a 2.8 mln bbl decrease in gasoline stocks and a 2.25 mln bbl drop in distillate stocks. We expect the EIA to report a stronger crude inventory build of 7-8 mln bbl given seasonally subdued refinery runs and a w-o-w drop in exports. We would not expect likely draws in refined products to outweigh the negative from such a strong crude stock build amid the weak market sentiment, which could amplify a price correction following the EIA release. We think that Brent under the current market conditions has exhausted its upside (we note that technical upside is at $40.0-41.4/bbl) and expect it to slide toward the $34.2/bbl technical support level later this week. This morning, prices have drawn some support from reports that China is bolstering its state oil reserves after the price crash, though elevated Chinese buying will not eat into the looming crude oil overhang from the OPEC+ supply boost. In addition, today updated market outlooks by the OPEC Secretariat and EIA are due. A new, downbeat statement by Saudi Aramco this morning that it will boost total capacity to a whopping 13 mln bpd is likely to weigh on prices further LD PRICES RECOVERING AFTER YESTERDAY'S 1.8% DROPEarly yesterday, investors were waiting for a press briefing from US President Donald Trump, who was expected to announce fiscal measures to support the US economy. However, the press conference failed to materialize. The president's economic advisor Larry Kudlow instead told journalists that the negotiations over the measures in Congress continued and that the administration would come out with another package of measures in the summer or fall. The resulting uncertainty has helped gold to recover from yesterday's decline and rise from $1,649/oz to $1,662/oz. This morning, the BoE announced an emergency 0.5 pp cut to its key policy rate, to 0.25%, to cushion the economy from the shock of the coronavirus. Investors are now waiting for the ECB to act at its meeting tomorrow. The policy easing by the world's leading central banks has been supportive for gold prices, as has persisting demand for physical gold from ETFs. Gold ETFs' holdings climbed by 256k oz to a new record high yesterday. Today's slate of data includes February CPI from the US. We expect gold to continue consolidating around $1,660/ RECOMMEND HEDGING AGAINST RISKS OF RISE IN COPPER PRICES IN RUBLES OVER NEXT 3-6 MONTHSCopper prices have been under pressure since the end of January, having lost almost 12% after the start of the coronavirus outbreak in China. Markets initially believed the epidemic could be limited to China and therefore priced in a drop in demand and an imbalance in the Chinese refined copper market. We think, however, that over the next 3-6 months China will manage to show the best results in dealing with the coronavirus, which should help to normalize global demand for refined copper and lead to growth in prices for copper.> Output rebounding in China. According to the Shanghai Metals Market, Chinese copper smelters operated at an average capacity utilization of 75% in February amid the coronavirus outbreak and produced 683.1 kt of copper cathodes. In March, capacity usage is expected to increase, with production rising 4.7% to 715.5 kt. The growth in output will likely lead to stock builds in the short term (for example, Shanghai Exchange copper stockpiles more than doubled over January 23-March 6), though we think the usual seasonal demand pickup in April-June should help to offset the temporary surplus. > Supply chains, exports to China normalizing. With economic activity rebounding, Mongolia has already announced it would resume coal and oil exports to China starting March 15 (export restrictions have been in place since February 10). Meanwhile, as of this week, most Chinese firms have returned to normal operations and supply chains in most provinces are back up.> Quarantine in Hubei province likely to be lifted. Chinese leader Xi's visit to Wuhan yesterday suggests to us that the Chinese government is seriously considering lifting the quarantine in the province (in effect since January 22). For Chinese copper smelters, which send sulfuric acid (a byproduct of production) to Hubei, this means that capacity usage can be further restored back to pre-epidemic levels. > Chinese government measures to support copper demand. The government has already launched monetary and fiscal measures that should support local copper producers. Though it is difficult to quantify the effect they will have on demand, we think key copper-consuming sectors like construction (20% of local demand), industrial equipment (15%) and infrastructure (25%) should be supported in 2Q-3Q20. > Risks to copper supply from Chile. In 2020, copper prices should be supported by the continuing protests in Chile amid depreciation in the local currency and coronavirus spread in the country. According to CRU, in 4Q19, strikes at the Escondida and Andida mines, as well as at other companies, along with logistics problems, took no less than 20 kt of production offline. Protests have continued this month. Compounding the issue is a coronavirus outbreak in the country (10 official cases) and a potential drop in copper exports. According to the official statistics, copper export revenues were down 8.6% in February versus February (to $2.48bn from $2.72 bln).According to the International Copper Study Group, the global copper market posted a sizable deficit of 384 kt in 11m19. However, the demand shock triggered by the global spread of the coronavirus could lead to a rise in inventories and tip the market into surplus in 1H20, though this could be offset somewhat by recovering demand in China and a possible decline in the global supply of copper concentrate (mine output was down 0.6% y-o-y in 11m19), as well as a drop in supply in the secondary market. We therefore believe that the global copper market could end the year with a mild deficit of around 176 kt. Also backing our idea to hedge against a potential rise in copper prices is the ruble's recent depreciation (it is down 5% versus the dollar since the collapse in the OPEC+ negotiations), as well as its potential to weaken further by the end of the