Commodities Daily - March 16, 2020

> Oil slides on demand, supply shocks despite Fed cuts and pledged US SPR purchases. It is crucial to highlight that the current situation is not a financial, but rather a medical crisis, meaning that no amount of support will be able to provide a boost to consumer demand, the economy and risk appetite while the coronavirus continues to spread and much of the world remains under quarantine. Today, we expect the EIA to forecast a negligible m-o-m increase in US tight oil production in April, which would provide some support to oil prices, likely helping Brent hold near $31/bbl for the rest of the day. Given the sheer scale of the ongoing US and EU travel restrictions, which could cause oil demand to collapse, we see potential for Brent to slide into a technical corridor of $27.1-29.8/bbl sometime this week, while it faces resistance at $34.2/bbl.> Gold finds unexpected support from emergency Fed rate cut. Following the souring in sentiment across precious metals markets on Friday, prices are rebounding this morning, with gold currently trading close to $1,540/oz. We are concerned that investors not only continue to close open positions in other assets amid the market volatility, but also sell their gold holdings for cash. It will be interesting to see what happens over the next few days with gold ETFs, which were buying gold at prices above $1,600/oz and may be starting to trim their positions.OIL SLIDES ON DEMAND AND SUPPLY SHOCK DESPITE FED CUTS AND US SPR PLEDGED PURCHASESOn Friday, Brent started to find its footing following a prolonged correction from $39/bbl at the start of the week to just around $33/bbl. The decline came to a halt mid-way through the Asian trading session, and soon thereafter front-month Brent began its climb to an intraday high of $36.15/bbl. For the rest of the day, it mirrored moves in major stock market indexes, fluctuating within a $33.0-35.2/bbl range. It eventually settled at $33.85/bbl, fixing $0.63/bbl above the previous settlement. One big development on Friday was Donald Trump's statement that he had "instructed the secretary of energy to purchase, at a very good price, large quantities of crude oil for storage in the US strategic reserve." According to a US Department of Energy official, the country's Strategic Petroleum Reserve has the capacity to store up to an additional 77 mln bbl of crude oil (it currently holds 635 mln bbl). There has been no comment as of yet on how fast the oil will be purchased. If the purchases were to take place over the span of a month, this would equate to 2.5 mln bpd, which is roughly the size of the output boost promised by the Saudis. Thus, this factor will only be positive in the short term. More importantly, it will be negative over the long term, as it will lead to swollen inventories, which will take a long time to bring back down.This morning, Brent dipped to $31.5/bbl despite the Fed's announcement last night of its second emergency rate cut in two weeks. It cut the upper bound of its federal funds rate target by 100 bps to 0.25% and also announced a $700 bln QE program, and that it would coordinate action with central banks from the rest of the G7 and Switzerland to ensure an adequate supply of dollar liquidity globally. Other central banks have followed with rate cuts (e.g. in Hong Kong and New Zealand) and liquidity injections (China, Australia) since last night's announcement. Despite this support, stock markets and oil are falling this morning, which implies that the Fed's move inspired more concern than confidence. It is also crucial to highlight that the current situation is not a financial, but rather a medical crisis, meaning that no amount of support will be able to provide a boost to consumer demand, the economy and risk appetite while the coronavirus continues to spread and much of the world remains under quarantine. The massive fiscal and monetary support will only cause risk appetite to rebound once the coronavirus news flow starts to become more upbeat.The EIA's drilling productivity report will be in focus later in the day, in particular its forecast for US tight oil production growth in April. The last time around, the agency predicted that US tight oil output would rise by 0.018 mln bpd to 9.175 mln bpd in March. In February last year, m-o-m growth for the coming March was seen at a much stronger 0.084 mln bpd, while for most of the last year m-o-m growth has been projected at just 0.07-0.08 mln bpd. This highlighted a bullish narrative of a slowdown in US oil production growth long before the recent oil price slump. In its monthly market outlook released last week, the EIA sharply lowered its US crude production growth forecast for 2020 to 0.76 mln bpd y-o-y (down from 0.96 mln bpd y-o-y), while next year the EIA sees output decreasing by 0.5 mln bpd y-o-y. This year, around 75-90% of US oil production is hedged at levels above the current prices. We expect the EIA to forecast a negligible m-o-m increase in tight oil production in April, which would provide some support to oil prices, likely helping Brent hold near $31/bbl for the rest of the day. Given the sheer scale of the ongoing US and EU travel restrictions, which could cause oil demand to collapse, we see potential for Brent to slide into a technical corridor of $27.1-29.8/bbl sometime this week, while it faces resistance at $34.2/ LD FINDS UNEXPECTED SUPPORT FROM EMERGENCY FED RATE CUTVolatility in the gold market remains extremely high. On Friday, gold dropped 3% to around $1,530/oz, with most of the selling coming during the US session. Prior to the open on Wall Street, gold was quoted at close to $1,597/oz, but around 20:00 Moscow time it plunged to as low as $1,507/oz alongside a sharp uptick in the Bloomberg DXY index, which advanced 4% on the day.Yesterday evening, the Fed announced that it would cut its fed funds rate target by a full percentage point to 0.00-0.25%, ahead of its scheduled March 17-18 meeting. It also announced a number of precautionary measures to stabilize the economy (see our FX strategists' story in Debt Markets Today for more). The Fed's radical steps were followed up by action from the BoJ (it announced a liquidity injection after an extraordinary meeting this morning) and calming words from the Reserve Bank of Australia (it said measures would be announced on Thursday). We are concerned that investors not only continue to close open positions in other assets, but also sell their gold holdings for cash amid the market volatility and increased interest in dollars. CFTC data for the week ending March 10 showed a decline in both long and short positions in gold, indicating that speculative interest in the asset is beginning to wane.It will be interesting to see what happens over the next few days with gold ETFs, which were buying gold at prices above $1,600/oz and may be starting to trim their positions. On Friday, they cut their holdings of gold by 549k oz, or 0.63%, which was the biggest drop since January 2017. Despite the heightened volatility, we are leaving our forecast for the average gold price in 2020 unchanged at $1,560/