Commodities Daily - May 12, 2020

> Oil declines on fears of second wave of coronavirus despite deeper production cuts from Saudi Arabia. Today, the market will digest the monthly EIA oil market outlook, with the focus on new US oil production forecasts for this year and next. We expect downward revisions to last month's numbers, which could support oil prices later today. From a technical perspective, Brent could test support at $28.4/bbl today, though we think it is unlikely to be broken in view of the monthly EIA report. Overnight, the API US oil inventory update will come into focus.> Gold holding around the $1,700/oz mark. Today will see the publication of the US NFIB small business optimism index and the monthly US Treasury budget report, but the gold market will mainly be focused on the US CPI (15:30 Moscow time). Four Fed officials are also due to speak, so we anticipate some comments on interest rates. We expect gold to stay in the $1,700-1,720/oz range today.OIL DECLINES ON FEARS OF SECOND WAVE OF CORONAVIRUS DESPITE DEEPER PRODUCTION CUTS FROM SAUDI ARABIAFront-month Brent slid toward $30/bbl yesterday morning before suddenly spiking to $31.5/bbl after Saudi Arabia announced that it will cut production in June by 1 mln bpd more than it agreed to at the OPEC+ meeting in early April. This suggests that Saudi Arabia will be producing close to 7.5 mln bpd in June (the lowest level in almost two decades), with May output likely to be trimmed to 8.2 mln bpd (versus the 8.49 mln bpd agreed last month) in a move to accelerate the market rebalancing and thus bolster oil prices. Last week, Saudi Aramco unexpectedly raised its official selling prices for all shipments to Europe and the US in June as well as for shipments of most oil grades to Asia. It is also important to highlight that not all of the additional cuts will fall on Saudi Arabia's exports, as domestic demand has been badly hit by Covid-19, so Saudi refinery runs are likely to remain low for the foreseeable future. Saudi Energy Minister Prince Abdulaziz declined to comment on whether the deeper cuts would be extended beyond June, highlighting that he would be "more than surprised" if the picture has not brightened by the time that OPEC+ next meets, in June (when the production cut policy may be altered yet again).Kuwait moved to support the Saudi initiative and said it will cut an additional 0.08 mln bpd from the 2.17 mln bpd level it had agreed to produce in June, taking its production to just below 2.1 mln bpd. The UAE also followed suit and will reduce June output by 0.1 mln bpd from the 2.45 mln bpd agreed in April. Energy Aspects commented that the additional Saudi cuts come at a time when the US government has linked US strategic and military commitments to the kingdom with action from the Saudis to stabilize oil prices and ease the pressure on US producers. The US is likely to keep up the pressure on Riyadh in the run-up to next month's OPEC meeting to ensure it continues to show that it is working to increase oil prices. This development is positive and will certainly help storages to avoid filling to the brim this month, as will improving demand. This is building a very strong case for a global crude stock draw in June, which could reach around 35 mln bbl following a hefty 220 mln bbl build in May.The oil price rally prompted by the Saudi news proved short-lived, however, with Brent breaking below $30/bbl later in the day on fears of a second wave in the coronavirus outbreak. Front-month Brent eventually settled at $29.63/bbl, $1.34/bbl below the previous settlement. Following tentative steps in Germany to ease the lockdown, new coronavirus infections have begun to accelerate exponentially, while Wuhan recently reported its first cluster of infections since the city's lockdown was lifted a month ago and South Korea warning of a second wave of the virus. A second wave is spurring renewed lockdowns, which could prove detrimental to our expectations of global inventory draws in June. Today, the market will digest the monthly EIA oil market outlook, with the focus on new US oil production forecasts for this year and next. We expect downward revisions to last month's numbers, which could support oil prices later today. From a technical perspective, Brent could test support at $28.4/bbl today, though we think it is unlikely to be broken in view of the monthly EIA report. Overnight, the API US oil inventory update will come into LD HOLDING AROUND THE $1,700/OZ MARKGold has seen limited volatility over the past two weeks and has consolidated around the $1,700/oz mark. It has held stable despite growing alarm elsewhere on the financial markets about a second wave of the coronavirus.Today, several Fed officials are scheduled to speak, and many investors are anticipating comments about the feasibility of negative interest rates for the US economy. Atlanta Fed President Raphael Bostic said yesterday that he was "not a big fan" of negative rates, but the market is now pricing in a cut in late 2020 or early 2021, which would take rates from neutral to negative. Further clarity on this could come on Wednesday, when Fed Chair Powell is due to give a speech.Today will see the publication of the US NFIB small business optimism index, the monthly US Treasury budget report and US CPI (15:30 Moscow time). We expect gold to stay in the $1,700-1,720/oz range