Commodities Daily - March 2, 2020

> Oil rebounds after Russia signals it will go along with OPEC+; investors pricing in deeper cuts. Following the reporting by the Financial Times last week, the market consensus now seems to be for an additional 1 mln bpd joint production cut by OPEC+. In our view, a decision to deepen cuts by 1 mln bpd in 2Q20 and return to the current levels in 2H20 would be sufficient to halt the decline in oil prices. Traders are starting to price in such an outcome this morning ahead of the meetings in Vienna later this week. From a technical standpoint, the upside for the May (front-month) Brent contract is limited to $52.9/bbl after its test of support at $48.5/bbl on Friday. We do not expect it to make such strong gains today, though an upbeat ISM manufacturing index from the US today could provide tailwinds.> Gold suffers steep decline on Friday. Gold slumped 3.6% on Friday but lost as much as 5.2% intraday. The main drop occurred during US trading hours, with gold plunging from almost $1,630/oz to $1,566/oz in the space of five hours. It is consolidating at $1,600/oz as we write amid expectations that prominent central banks will announce measures to support their economies. Should sentiment remain negative, we could see further pressure this afternoon, with the technical picture pointing to $1,582/oz.OIL REBOUNDS AFTER RUSSIA SIGNALS IT WILL GO ALONG WITH OPEC+; INVESTORS PRICING IN DEEPER CUTSOn Friday, the Brent April contract traded sideways in a $50.0-51.3/bbl range, eventually expiring at $50.52/bbl, fixing $1.66/bbl below the previous settlement. The May contract, which has become the new front-month one, fell almost $2/bbl during the day on Friday and even briefly broke below $49/bbl, pressured by a selloff in stock markets. It eventually settled at $49.67/bbl, fixing $2.06/bbl below the previous settlement. One bullish factor on Friday that helped push Brent back to around $50/bbl was the EIA's 914 report on US oil production in December, which showed a decrease in output from November's record high of 12.86 mln bpd to 12.78 mln bpd (up 0.74 mln bpd y-o-y). This was despite higher WTI prices m-o-m and a mild winter, with drilling and well completions expected to continue to trend downward, reflecting stricter capital discipline. This year, we expect US crude output to increase by around 0.5 mln bpd y-o-y, with low prices potentially providing stronger headwinds for shale producers down the line, as gains in productivity and efficiency have likely peaked, at least for now.This morning, the May Brent contract has already pared back all of Friday's losses, having gained almost $3/bbl since the start of the Asian trading session to reach $51.6/bbl even though the global coronavirus death toll topped 3,000, New York City registered its first case, and new infections were reported in the Seattle area and California. The rally has also come despite a plunge in the Caixin Chinese manufacturing PMI from 51.1 in January to 40.3 in February, the steepest-ever decline to the weakest-ever reading since the survey was launched almost two decades ago. This was the first good snapshot of the state of the Chinese economy since the outbreak of the coronavirus and had been expected to be extremely weak. In February, Chinese officials rolled out various support measures to help businesses - especially small enterprises, which are key employers - facing a cash crunch. These measures are likely to result in more upbeat PMI readings in March. The main reason for oil's rally this morning was President Vladimir Putin's strong hint on Sunday that Russia would join OPEC+ this week in its efforts to offset the drop in oil demand this year through deeper production cuts. He said that the OPEC+ mechanism "has already established itself as an effective tool in ensuring long-term stability in global energy markets" and highlighted that the fact that Russia has vast financial reserves to cushion the impact of turbulence in the oil market "doesn't eliminate the need for action, including in cooperation with our foreign partners." Following the reporting by the Financial Times last week, the consensus now seems to be for an additional 1 mln bpd joint cut by OPEC+. In our view, a decision to deepen cuts by 1 mln bpd in 2Q20 and return to the current levels in 2H20 would be sufficient to halt the decline in oil prices. Traders are starting to price in such an outcome this morning ahead of the meetings in Vienna later this week. From a technical standpoint, the upside for the May Brent contract is limited to $52.9/bbl after its test of support at $48.5/bbl on Friday. We do not expect it to make such strong gains today, though an upbeat ISM manufacturing index from the US could provide LD SUFFERS STEEP DECLINE ON FRIDAYThe gold rally in place since February 15, which saw the metal reach its highest level since 2013, turned into a rout on Friday. Over the previous two weeks, gold had gained 7.5% and reached as high as $1,688/oz, but on Friday it closed 3.6% lower. The intraday loss reached as high as 5.2%, and the bulk of the selloff was witnessed during US trading hours.Media have ascribed the drop to investors selling gold to cover losses incurred in other asset classes, including equities. Reports also suggest that margin calls may have been triggered, leading to a selloff across the entire precious metals space (silver slumped 6.25%, palladium sank 8.7% and platinum tumbled 4.1%).While we generally agree with this theory, we haven't seen any negative moves in other defensive assets (US Treasury yields moved lower throughout the day on Friday ;yields are down 17 bps since Thursday evening), so we think the rather sharp declines in metals markets were also due to a clear imbalance in physical demand. As a result of the coronavirus, demand for jewelry and investment demand for bullion and coins have fallen sharply in China, which is a huge market. Moreover, DM demand for certain gold products has also come under threat. For example, demand for gold coins in the US halved in February. Meanwhile, investment demand (from ETFs and other investors) has increased so sharply this quarter that it has created the risk of additional volatility in the event of a quick outflow of funds (traditionally, investors have significant flexibility in terms of investment/divestment decisions). All of these factors initially indicated that the rally was merely speculative, but now we have seen a market reversal that is likely to lead to consolidation at more fundamentally justified levels.As we write, gold is trading around the $1,600/oz mark amid expectations that global central banks will announce support measures. Late on Friday, Fed Chairman Jerome Powell said the US economy remained stable, but the coronavirus has created growing risks for growth. He added that the Fed stands ready to act to maintain economic stability. The market is currently pricing in three or four Fed rate cuts before the end of the year, as well as JPY500 bln in liquidity injections from the BoJ and a rate cut in Australia (set to be announced tomorrow).Should sentiment remain negative, we could see further pressure this afternoon, with the technical picture pointing to $1,582/