Commodities Daily - May 19, 2020

> Oil prices continue to rise amid upbeat data, increased risk appetite. This morning, the rallies in oil prices and the stock market have taken a breather, with Brent consolidating around $35/bbl, just above the $34.3-34.9/bbl technical range we highlighted yesterday. Another push higher could place Brent within the $36.0-36.4/bbl technical corridor, where we believe the ongoing rally would almost certainly come to a halt. We think that the market is getting ahead of itself and see a high risk of repricing. Further signs of deterioration in US-China relations are a factor that could set off the potential correction.> Gold price surge peters out, now trading at around $1,730/oz. The key news yesterday was of a successful clinical trial of a coronavirus vaccine by Moderna. Whereas gold was consolidating around the $1,765-1,770/oz mark prior to the news, it rapidly shed nearly $35/oz after the headline hit the wire. Even if demand for risk stays mostly flat, we think gold could remain under pressure. Today, investors will be eyeing speeches by US Fed Chairman Jerome Powell and Treasury Secretary Steven Mnuchin, during which they will discuss the measures that have been carried out to support the economy.OIL PRICES CONTINUE TO RISE AMID UPBEAT DATA, INCREASED RISK APPETITEFront-month Brent was on the rise during the day yesterday alongside a move higher in global stocks. The benchmark surged from $32.7/bbl to as high as $35.7/bbl. On Wall Street, the S&P 500 posted its biggest one-day gain in percentage terms in almost six weeks. Brent eventually settled at $34.81/bbl, fixing $2.31/bbl above the previous settlement. One factor supporting risk sentiment was the success of a small, early-stage trial for a coronavirus vaccine by the pharmaceutical company Moderna, which raised hopes of a faster recovery from the current economic slump. Meanwhile, IHS Markit published a comment saying it would likely take 2-3 years for global economic output to recover to pre-pandemic levels, while the contraction this year is likely to be three times that seen after the 2009 global financial crisis (the agency sees global GDP dropping 5.5% in 2020). Further signs of deterioration in the US-China relationship also failed to dampen yesterday's relative optimism, including renewed calls from the US to limit China's influence on the WHO, the stepped-up US measures against Huawei and reports of possible new restrictions on NASDAQ that would make it more difficult for Chinese companies to list.The promising vaccine trial results came alongside fairly upbeat data on global oil demand. Bloomberg reported that Chinese demand for oil was likely almost back to levels last seen before the coronavirus outbreak, while Indian diesel sales were up 75% from April in the first half of May, motor fuel consumption in the UK is rising week by week (it is now about 40-45% below pre-crisis levels, according to the country's Petroleum Retailers Association) and jet fuel consumption is edging up in Spain. Investors were also encouraged by yesterday's upbeat EIA drilling productivity report, which contained a forecast that US tight oil output would drop 0.197 mln bpd in June to 7.822 mln bpd, which would be the lowest since August 2018. The scale and speed of the US output decline (despite the US not being obligated to cut under the new OPEC+ deal) is certainly positive for oil prices. Overall US output peaked at 12.9 mln bpd in November 2019, with shale oil production accounting for 9.1 mln bpd of that figure. The EIA report also noted that in April the numbers of both drilled and completed wells were at the lowest levels since December 2016.We believe the sharp decline in US production amid the massive OPEC+ cuts and the recovery in oil demand are the main factors behind the recent surge in oil prices (to perhaps unjustifiably high levels). We have long anticipated that a sustained drawdown in global crude stocks would begin in June. Investors have been preparing for the stock draws by piling into long positions as early as possible in an attempt to buy on the lows ahead of what is expected to be a bullish 2H20. We note that some crude oil grades are already backwardated, which should lead to at least some unwinding of the storage buildup. However, inventories built by a record amount from this January to May, so it will take months to eliminate the overhang, as the demand recovery is likely to be slow and staggered. Thus, in our view, the market is likely getting ahead of itself, implying high risks of repricing. Furthermore, if prices rise too quickly, the supply that has been shut in will start to return, which would in turn undermine the expected strong inventory draws in 2H20. This morning, the rallies in oil prices and the stock market have taken a breather, with Brent consolidating around $35/bbl, just above the $34.3-34.9/bbl technical range we highlighted yesterday. Another push higher could place Brent within the $36.0-36.4/bbl technical corridor, where we believe the ongoing rally would almost certainly pause. LD PRICE SURGE PETERS OUT, NOW TRADING AT AROUND $1,730/OZYesterday, a company called Moderna made an unexpected announcement that a first clinical trial of a coronavirus vaccine went successfully. The news immediately pushed defense assets lower. The 2y US Treasury yield added 3 bps to 0.17%, while the 10y yielded 8 bps higher to 0.73%. Gold prices also came under pressure, dropping $35/oz over the course of just a few hours. This morning, gold is trading around the $1,730/oz level. Today, investors will be eyeing speeches by US Fed Chairman Jerome Powell and Treasury Secretary Steven Mnuchin (17:00 Moscow time), during which they will discuss the measures that have been carried out to support the economy. Even if demand for risk stays mostly flat, we think gold could remain under pressure and could return to its previous range of $1,700-1,720/