Commodities Daily - March 4, 2020

> Oil trades sideways amid emergency Fed rate cut and OPEC+ JTC recommendation to make a deeper cut. The OPEC+ ministerial monitoring committee, which is empowered to advise certain action to the entire group, will meet today. However, we do not expect a concrete decision to emerge before Friday evening after the final OPEC+ meeting. Today, we expect the EIA to report a strong crude inventory build of 3-4 mln bbl amid seasonally subdued refinery runs. We think the initial price reaction to the report will be bearish and that Brent may retest technical support at $51.8/bbl following the release. However, the negative price effect may be partially offset by what should be draws in the refined product category.> Emergency Fed rate cut causes gold prices to surge. Yesterday, the Fed announced an emergency 50 bp rate cut to counter the effects of the coronavirus epidemic. Gold prices, which had been trading sideways around the $1,600/oz mark, shot up after the announcement and closed 3.2% higher. As we write, gold is quoted at around $1,635/oz. Today will see the publication of composite and services PMI readings from Europe and the US, the ADP US employment report for February and the Fed Beige Book. We expect gold prices to remain elevated and note that the next level of technical resistance is $1,657/oz.OIL TRADES SIDEWAYS AMID EMERGENCY FED RATE CUT AND OPEC+ JTC RECOMMENDATION TO MAKE A DEEPER CUTAfter surging $3/bbl to $52/bbl on Monday, during yesterday's Asian session front-month Brent rallied once more, climbing to just shy of the $54/bbl mark. During European trading it began to consolidate around $53/bbl and traded close to this level before what proved to be a very eventful start to the US session. Just minutes into Wall Street trading, the Fed announced an emergency rate cut of 50 bps to 1.00-1.25%. This drastic move was the first off-schedule rate cut since the depths of the financial crisis more than a decade ago. The market initially cheered and Brent climbed to an intraday high of $53.9/bbl. But at the short press conference following the decision Chairman Jerome Powell emphasized that monetary policy has its limits, which somewhat tempered the upbeat mood. Also, such a dramatic and sudden decision suggested to some that the coronavirus situation could be more serious than previously believed. As a result, the emergency cut failed to ease concerns about an economic downturn: the S&P 500 ended up closing 3% lower, which weighed on oil prices later in the day. Shortly after the Fed rate cut, the OPEC+ Joint Technical Committee recommended a 0.6-1 mln bpd additional cut for 2Q20 (after recommending a 0.6 mln bpd cut in early February). However, the extended range did little to buoy sentiment. The many investors who had been assuming a cut of over 1 mln bpd were left disappointed. Brent eventually settled at $51.86/bbl, fixing $0.04/bbl below the previous settlement. The OPEC+ ministerial monitoring committee, which is empowered to advise a particular action to the entire group, will meet today. However, we do not expect a concrete decision to emerge before Friday evening after the final OPEC+ meeting. Also, because of coronavirus fears, limited media scrums are expected, implying little information will trickle out during the negotiations. Meanwhile, overnight the API reported that US crude stocks rose by 1.7 mln bbl to 446.6 mln bbl last week (the EIA's latest report estimated them at 443.3 mln bbl). The buildup came amid a 0.06 mln bpd decrease in refinery runs and a 0.11 mln bpd increase in imports. The refined product data was bullish, showing a 3.9 mln bbl draw in gasoline stocks and a 1.7 mln bbl decrease in distillate inventories. Investors are currently positioning themselves for the EIA report today (18:30 Moscow time). The Bloomberg consensus expects a 3 mln bbl build in crude stocks, a 1.8 mln bbl decrease in gasoline stocks and a 2 mln bbl drop in distillate stocks. We expect the EIA to report a strong crude inventory build of 3-4 mln bbl amid seasonally subdued refinery runs. The lower refinery uptake, which is due to seasonal maintenance (and likely to be amplified by worse refining economics), results in lower gasoline production. This will very likely result in a draw in gasoline and distillate stocks. In our view, the initial price reaction to the report will be bearish (because of the strong crude stock build). Brent may retest technical support at $51.8/bbl following the release. However, the negative price effect may be partially offset by what should be draws in the refined product ERGENCY FED RATE CUT CAUSES GOLD PRICES TO SURGEEarly yesterday, investors were eagerly awaiting the results of a conference call to be held by G7 central bank governors and finance ministers at 15:00 Moscow time. Much to their disappointment, the statement that followed revealed only that the participants were ready to use a wide range of both monetary and fiscal policy tools to mitigate the economic risks posed by the coronavirus. Afterward, gold hovered around the $1,600/oz mark. However, at 18:00 Moscow time, the Fed announced that it would lower the Fed funds rate target 50 bps to 1.00-1.25%, which caused gold to surge. The Fed's short press release mirrored Chairman Jerome Powell's recent rhetoric from last Friday, saying that "the coronavirus poses evolving risks to economic activity." It did not contain any insight about what the regulator will do at its March 17-18 meeting. Following the surprise announcement, prices on gold shot up and finished the day 3.2% higher. Other safe-haven assets also made quick gains, including US Treasuries. The yield on the benchmark 10y note fell by as much as 23 bps to as low as 0.92% intraday before recovering to 0.99% by the close.Worth noting is that the emergency rate cut had little impact on investors' expectations for future Fed meetings. Markets are still pricing in a 50 bp cut at the Fed's March meeting and more than three cuts in total by year-end. In other words, rates could fall close to zero this year. This is fundamentally supportive for gold, which tends to rise during periods of policy easing. For now, we are leaving our forecast for the average gold price in 1H20 at $1,605/oz, though an upward revision would likely be in order if the coronavirus were to continue to spread. As we write, gold is quoted at close to $1,635/oz. Today will see the publication of composite and services PMI readings from Europe and the US, the ADP US employment report for February and the Fed Beige Book. We expect gold prices to remain elevated and note that the next level of technical resistance is $1,657/