Commodities Daily - March 20, 2020

> Oil spikes as US considers intervening in Saudi-Russia oil market spat. We think the current oil price rally is unsustainable and is purely based on speculative rhetoric, unsupported by any decisive action that will boost the market. Moreover, Bloomberg reported this morning that Russia has described the Saudi oil plan as "blackmail," which underscores Russia's resolve in this oil market war. Despite the current positive stock market momentum, we think Brent is likely to reverse and test support at $27.1/bbl, with a break below taking it down to $25.3/bbl.> Gold prices surge above $1,515/oz as dollar weakens. Despite disappointing economic data from the US and Europe, Asian stock indexes were up this morning and precious metals opened higher. The PBoC left rates unchanged today, while markets remain focused on a stimulus package being put together in the US. We expect high volatility later on today given quadruple witching, and see gold falling back below $1,500/oz.OIL SPIKES AS US CONSIDERS INTERVENING IN SAUDI-RUSSIA OIL MARKET SPATFront-month Brent traded sideways in a $25-27.2/bbl range during Asian trading and most of the European session yesterday but began to rally almost straight after the opening on Wall Street. It eventually settled at $28.47/bbl, $3.59/bbl above the previous settlement. This morning, it edged above $30/bbl but failed to hold on. Support came from news that the US government could intervene in the oil price war, though the details are unclear. The Wall Street Journal reported that options under consideration include new sanctions against Russia and offering Saudi Arabia incentives to reduce output, though the report indicated that the administration has come to no decision and did not detail exactly what measures could be employed toward either country. Commenting on the Saudi-Russia oil spat, US President Donald Trump yesterday said that "we have a lot of power over the situation, and we are trying to find some kind of a medium ground" and that "at the appropriate time I'll get involved." Experience shows that it is not unusual for a US president to intervene during an oil crisis via negotiations with Saudi Arabia, with which the US is closely allied. Trump continues to stress that low oil prices equate to a tax cut for American consumers, which is providing considerable support during the coronavirus-related lockdown and is reducing the economic strain. Low fuel prices would strongly benefit Trump during his re-election campaign later this year. We therefore expect him to start supporting the US shale industry via diplomatic talks with the Saudis, but only once he has potentially been re-elected toward the year-end. It is also understandable that the US shale industry is lobbying for protectionist measures without considering the geopolitical consequences given that the current oil price environment is strongly undermining its long-term prosperity.The US Department of Energy yesterday announced it will buy up to 30 mln bbl of crude for the country's strategic petroleum reserve by the end of June and could buy as much as 77 mln bbl over the medium term, which proved slightly supportive for the market. However, that extra 77 mln bbl equates to additional demand of just 2.5 mln bpd per month. This is slightly below the looming Saudi supply boost in April, while Saudi Aramco has already signaled that it will continue to supply excess volumes in May as well. These US purchases will therefore be slightly supportive in the short term but negative over the long term, as they will swell inventories, which will take a long time to bring back down.We therefore consider the latest oil price rally to be unsustainable and purely based on speculative rhetoric, unsupported by any decisive action that will boost the market. Moreover, Bloomberg reported this morning that Russia has described the Saudi oil plan as "blackmail," which underscores Russia's resolve in this oil market war. Despite positive stock market momentum, we think Brent is likely to reverse and test support at $27.1/bbl, with a break below taking it down to $25.3/ LD PRICES SURGE ABOVE $1,515/OZ AS DOLLAR WEAKENSYesterday, gold traded in a narrow range of $1,470-1,480/oz for much of the day. The US and Europe published disappointing economic data, which appeared to already be impacted by the coronavirus outbreak. US initial jobless claims shot up to 281k (highest since September 2017) from 211k last week. The Ifo German business climate index also fell from 96.0 to 87.7 points in March, while the business expectations index slid from 93.2 to 82.0.Gold prices have reacted very little to economic data the last few weeks, as the market is awaiting more support from governments and central banks. Both chambers of the US Congress continue to work on fiscal stimulus packages that would cost $1.0-1.5 trln. In addition, the Fed announced a new lending facility to help money market funds meet demand to withdraw money. Meanwhile, the PBoC left rates unchanged this morning, keeping the 1y loan prime rate at 4.05% (the Bloomberg consensus had suggested a cut to 3.95%) and the 5y rate at 4.75%.Markets are pushing higher this morning. The DXY index has lost 1.4%, and gold prices have shot up through the $1,515/oz mark. We expect volatility to pick up in the second half of the day with quadruple witching today in the US. Gold looks set to move back below the $1,500/oz mark