Commodities Daily - March 13, 2020

> Oil keeps mirroring stock markets as supply floods the market. This morning, Brent gained some ground and is trading near $34/bbl as we write, as the stock market rout is easing. Today, the Democrat-controlled US House of Representatives is expected to present a plan to address the coronavirus outbreak, which has already secured the support of the White House. If the measures are seen as adequate, markets could even stage a modest recovery. Given that oil prices are currently correlating very strongly with major stock market indexes, an upbeat plan should support Brent as well. We think it could even test the $36/bbl mark later in the day. > We are opening a short-term trading idea for gold ahead of the March 17-18 Fed meeting. Gold dropped 3.6% yesterday amid a sharp selloff across most asset classes that was fueled by still-high uncertainty in markets. The Fed could decide to lower rates by as much as a full percentage point at the scheduled March 17-18 meeting, which would provide a boost for gold prices. Following the ruble's depreciation in the wake of the collapsed OPEC+ talks, the ruble gold price could rise to R131,000/oz, which is the target price in our new recommendation.OIL KEEPS MIRRORING STOCK MARKETS AS SUPPLY FLOODS THE MARKETAfter dropping $3/bbl early yesterday to around $33.3/bbl - following the US issuing a 30-day ban on travel from Europe (likely meaning a further drop in demand for jet fuel and other fuels) and the WHO declaring the coronavirus outbreak a pandemic - front-month Brent attempted to consolidate around $34/bbl. Shortly into the European session, Brent slid back toward $33/bbl and then traded around this mark for the rest of the day. We note a brief evening jump to $34/bbl after the Fed announced that it would inject an additional $5 trln in liquidity into US money markets over the coming month, an unprecedented move that possibly signals a new era of QE to stimulate the economy and stabilize the financial system. It also points to a high probability that the Fed could cut rates to zero next week. The optimism proved short-lived, however, as panic swept across markets, which are doubtful of the effectiveness of policy responses as the coronavirus outbreak worsens globally. Brent eventually settled at $33.22/bbl, fixing $2.57/bbl below the previous settlement.A key theme for the oil market has been the return of so-called "super-contango." Yesterday, the Brent futures curve one-year contango (calendar spread between month 1 and month 12, where the former trades at a discount to the latter) passed the $10/bbl mark, which was last observed in 2015. Back in 2014-16, OPEC decided to pursue a free market and pumped at will, flooding the market with oil. Such a market situation allows traders to make a fortune by purchasing crude now, storing it and locking in profit by selling forward contracts. Currently, Energy Aspects estimates a new flood of Middle Eastern supply, arriving during weak demand, will see global crude stocks build by 355 mln bbl over March-June. The contango is incentivizing floating storage, with the cost to transport oil on supertankers soaring yesterday amid a boost in demand for vessels and the overwhelming supply of oil. Another estimate suggests that over 800 mln bbl of onshore storage and 70 mln bbl of offshore storage is available to fill, meaning that stocks can build deep into 2H20, likely to record highs, weighing on spot prices. Products storage is set to become the next focus after crude stocks build. This morning, Brent gained some ground and is trading near $34/bbl as we write, as the stock market rout is easing. Today, the Democrat-controlled US House of Representatives is expected to present a plan to address the coronavirus outbreak, which has already secured the support of the White House. If the measures are seen as adequate, markets could even stage a modest recovery. Given that oil prices are currently correlating very strongly with major stock market indexes, an upbeat plan should support Brent as well. We think it could even test the $36/bbl mark later in the day.WE ARE OPENING A SHORT-TERM TRADING IDEA FOR GOLD AHEAD OF THE MARCH 17-18 FED MEETINGLast week, gold tested $1,700/oz and set a new seven-year high. However, over the past couple of days the mood among investors has soured to the point that the selloff in global markets has spilled over into traditional havens such as US Treasuries and gold. Gold prices dropped 3.6% yesterday and have traded as low as $1,552/oz this morning, while the US 10y Treasury sold off (the yield reached 0.84%). The main US stock indexes, meanwhile, fell nearly 10%, posting the biggest one-day declines since 1987. We expect gold prices in rubles to resume growing and show strong dynamics over the next 1-2 months:> Next week, the Fed and BoJ may cut rates in order to try to neutralize the effect of the coronavirus. Currently, coordinated steps are being taken to support short-term liquidity in the financial system. The Fed announced that it would provide $1.5 trln in liquidity at three auctions yesterday and today. It also announced that over the next month it would offer $5 trln to market participants. This morning, the BoJ followed the Fed's lead and reported that it would inject JPY500 bln (around $4.8 bln) through an unscheduled repo secured by Japanese government bonds. Given these measures, we expect a significant decrease in interest rates next week - the Fed may even cut by 100 bps. This should push gold prices higher, particularly given that now the market is expecting a protracted period of zero rates. > The coronavirus continues to spread in Europe and North America, which is supporting demand for gold ETFs. DM ETFs have been active buyers of gold so far this year, a circumstance attributable to the high level of uncertainty in these markets. Yesterday, the mayor of New York City declared a state of emergency. Meanwhile, French President Macron addressed the nation about the virus and declared that schools and universities across France would close starting March 16. > Given the economic effect of the virus in the US and Europe the PMIs for March could end up being quite weak. If the data that is due to be published in early April comes in weak, gold could climb to $1,680-1,700/oz. Amid persisting uncertainty in global financial markets and soft monetary policy from leading central banks, we expect gold prices to remain high and possibly return to the $1,700/oz mark this spring. However, we are not changing our full-year average forecast of $1,560/oz, as we see prices stabilizing in 2H20 and moving down just $1,500/oz in