Commodities Daily - March 12, 2020

> Oil slides today as coronavirus declared pandemic, US bans travel from Europe. This morning, Brent fell to $33.3/bbl after the US banned travel from Europe for 30 days, which follows the WHO declaring the coronavirus outbreak a pandemic. We stick to our view published yesterday that Brent under the current market conditions has exhausted its upside, and we expect it to slide toward the $30/bbl mark in the days to come.> Gold prices continue to drop as widespread selling even hits safe havens. Volatility and liquidity in gold both remain high. However, the mood in the markets is so negative that even traditional safe havens are coming under pressure. The yield on the 2y Treasury was mostly flat yesterday, while gold prices finished the day 0.9% lower. Today, the ECB is expected to deliver support, while next week the BoJ and Fed hold scheduled meetings. As of this writing, gold is trading at around $1,640/oz. We expect the recent high intraday volatility to remain in place. The current support level for gold is $1,633/oz. OIL SLIDES TODAY AS CORONAVIRUS DECLARED PANDEMIC, US BANS TRAVEL FROM EUROPEAfter rising almost $2/bbl to as high $39.7/bbl early yesterday, front-month Brent began to slide and then in early European trading hours consolidated around $36/bbl. During the second half of the day, it exhibited very low volatility and eventually settled at $35.79/bbl, fixing $1.49/bbl below the previous settlement. The weekly EIA inventory report failed to cause a meaningful pickup in volatility despite its showing a hefty 7.66 mln bbl increase in US crude stocks (in line with our expectation) to 451.8 mln bbl last week, compared with the Bloomberg consensus of a 1.7 mln bbl build and bigger than the 6.4 mln bbl increase that API had reported. The build came amid a 0.74 mln bpd decrease in exports to 3.41 mln bpd and a 0.17 mln bpd increase in imports to 6.4 mln bpd. A 0.1 mln bpd decrease in crude oil production to 13.0 mln bpd, together with a tiny increase in refinery inputs, proved insufficient to offset the overall build. Crude stocks have finally started to build strongly, as seasonal refinery maintenance continues, while this was the first week when elevated exports have come down. The global spread of the coronavirus could soon put the brakes on US crude exports with lower refinery demand globally. Meanwhile, US refiners are expected to boost inputs late this month, unless domestic refined product demand is dented by the coronavirus situation. Yesterday's refined product data was bullish, with total petroleum stocks (including oil but excluding US strategic petroleum reserves) down 7.57 mln bbl. Gasoline stocks fell 5 mln bbl to 247 mln bbl, while distillate stocks were down 6.4 mln bbl to 128 mln bbl. We think this managed to offset the bearish crude stock estimate and is why oil prices traded sideways after the release. Besides the fact that investors were focused mostly on government actions to tackle the coronavirus spread yesterday, another reason for the lack of price movement following the EIA report was there being plenty of other oil market data releases. OPEC and the EIA in their monthly global oil market updates slashed demand growth estimates for this year, OPEC now estimating only 0.06 mln bpd growth y-o-y and the EIA a rather optimistic 0.36 mln bpd y-o-y. Another highlight was a downward revision to the EIA's US crude production forecast, which is now expected to grow 0.76 mln bpd y-o-y (down from 0.96 mln bpd last month), though next year the EIA sees it decreasing 0.5 mln bpd y-o-y. Note that this year around 75-90% of US oil production is hedged at levels above where prices have slumped to. Both OPEC and the EIA estimate that OPEC production must average 28.1 mln bpd for the market to be in balance, while we think it is now likely to reach 31 mln bpd in April (from an actual 27.8 mln bpd in February), which implies major stock builds. This morning, Brent fell to $33.3/bbl after the US banned travel from Europe for 30 days, which follows the WHO declaring the coronavirus outbreak a pandemic. This is very likely to throw business travel and tourism into disarray, meaning a further drop in demand for jet and other fuels. We stick to our view published yesterday that Brent under the current market conditions has exhausted its upside, and we expect it to slide toward the $30/bbl mark in the days to come. Today, the ECB makes a rate decision, with markets watching to see whether and how the bank follows the Fed in lowering rates.> Trading ideas. We have come up with a couple of ideas for how to act in the wake of the recent market developments.> For Russian end users: Lock in current refined product prices. The recent oil price slump has dragged down refined product prices, while the ruble's depreciation has so far been moderate. This means that global benchmarks for gasoline, naphtha, jet fuel, distillates, marine fuels and other refined products quoted in dollars are now at multi-year lows in rubles as well. We note that historically sharp ruble depreciation amid a slump in oil prices has resulted in virtually zero change in ruble refined product prices, which meant there was little need for hedging. However, following the recent plunge in oil prices, companies now have the opportunity to purchase refined products at multiyear low ruble prices, well below the prices incorporated into their 2020 business plans. In our view, airlines and companies in the fishing industry, for example, could consider taking advantage of this opportunity.> For oil traders: Prepare to capitalize on coming supercontango in Brent. The looming global oil market oversupply (resulting from the "pump at will" strategy of OPEC+ and a lack of oil demand growth) is very likely to lead to supercontango in Brent and other crude benchmarks this year. Oil traders can take advantage of this by purchasing crude at the current cheap spot prices, storing it and then selling it at higher prices in the future, locking in profits via hedging. In 2009 and 2014-2016, major global oil traders made near-record-high profits by employing this LD PRICES CONTINUE TO DROP AS WIDESPREAD SELLING EVEN HITS SAFE HAVENSYesterday, markets were rattled after the WHO officially assigned the coronavirus the status of pandemic and Donald Trump banned travel to the US from Europe. Gold, meanwhile, saw a volatile day: intraday quotes reached as high as $1,670/oz and fell to as low as $1,632/oz. Market liquidity remains high. After trading volumes in gold reached an all-time high of $100 bln on Monday, according to LBMA data, volumes remained quite high yesterday. Today, the ECB is expected to deliver support, while next week the BoJ and Fed hold scheduled meetings. As of this writing, gold is trading at around $1,640/oz. We expect the recent high intraday volatility to remain in place. The current support level for gold is $1,633/oz.