Commodities Daily - September 15, 2020

> Oil pressured by dismal OPEC market outlook; IEA report and US industrial production looming. Today, the oil market will primarily be focused on the IEA monthly report, which will out before you receive this and will likely set the tone for the day, with US industrial production for August and API US inventory data likely to be key for prices later. The risks are skewed to the downside for the IEA report, with an upbeat revision to this year's oil market outlook regarded as very unlikely given the fundamental backdrop. US industrial production is unlikely to move oil prices much, as it is unlikely to be sufficiently upbeat to significantly boost oil demand growth expectations and in turn the dollar, which would be oil price negative. In light of the above, we expect Brent to break below technical support at $39.5/bbl, which would pave the way to the next support level at $38.4/bbl. This level could be tested overnight, as the API data is expected to show a second consecutive build in US crude oil stocks.> Gold prices rise as dollar weakens ahead of FOMC meeting. The main items on today's data calendar are the ZEW Germany survey for September (which will be released before you receive this) and US industrial production for August. A positive economic sentiment reading in the former would give a further boost to the euro and could push gold toward technical resistance at $1,975/oz, with a break above opening a pathway to the $1,984-1,996/oz range. However, we believe that the US industrial production data is likely to beat the consensus, which would support the dollar, thus offering up headwinds for gold prices.OIL PRESSURED BY DISMAL OPEC MARKET OUTLOOK; IEA REPORT AND US INDUSTRIAL PRODUCTION LOOMINGYesterday, front-month Brent was trading near $40/bbl ahead of the monthly OPEC report. Following the release, it slipped to the $39.3/bbl mark, as the cartel has made a number of downbeat revisions to its market outlook. For a second month in a row, it downgraded its global oil demand estimate for this year, this time by 0.4 mln bpd (now expected to average 90.23 mln bpd) following a 0.09 mln bpd m-o-m revision last month. It now expects demand to average 96.86 mln bpd in 2021 and has lowered its forecast for the next five quarters by an average of 0.77 mln bpd. The group has also raised its projections for non-OPEC production over the next five quarters by an average of 0.4 mln bpd, mostly due to the stronger outlook in the US. The demand forecast for OPEC crude for this year was lowered by 0.75 mln bpd and by a hefty 1.14 mln bpd in 2021. This implies that OPEC+, having started to gradually increase production in August, has probably misjudged the strength of demand. This will be discussed at Thursday's JMMC meeting, though we think that the group is unlikely to alter its production plans now as the focus remains on improving compliance among countries such as Nigeria, Iraq and now the UAE.During yesterday's Wall Street session, the EIA drilling productivity report provided some support for oil. The agency expects US tight oil output to drop: it projects a 0.068 mln bpd m-o-m drop in October to 7.64 mln bpd. This would be the first decline since May, according to revised data from the agency. This somewhat contrasts with the last week's EIA monthly oil market report, which contained a new forecast that US crude production would fall by only 0.87 mln bpd this year, while last month the EIA predicted a 0.99 mln bpd drop. Brent eventually closed $0.22/bbl lower on the day at $39.61/bbl. This morning, investors have been digesting upbeat Chinese retail sales and industrial production data for August, with the former rising for the first time this year. China's refinery throughput in August was 14 mln bpd, the second highest level on record (falling slightly short of July's 14.02 mln bpd), as refineries worked to digest record imports brought in earlier this year. This supports our view that the return of vigorous Chinese buying in 4Q20 will help considerably to run down the current inventory overhang. News that nearly 0.4 mln bpd of offshore crude oil production has been shut in the US Gulf of Mexico after storm Sally was upgraded to a hurricane on Monday is also providing support for oil. Sally is expected to make landfall today, with its path shifting east toward Mississippi, likely sparing some of Louisiana's refining operations.Today, the oil market will primarily be focused on the IEA monthly report, which will out before you receive this and will likely set the tone for the day, with US industrial production for August and API US inventory data likely to be key for prices later. The risks are skewed to the downside for the IEA report, with an upbeat revision to this year's oil market outlook regarded as very unlikely given the fundamental backdrop. We expect US industrial production to beat the consensus forecast of 1.0% growth albeit showing a slower rebound in m-o-m terms. This is unlikely to move oil prices much, as it would not be upbeat enough to boost oil demand growth expectations significantly and boost the dollar, which would be oil price negative. In light of the above, we expect Brent to break below technical support at $39.5/bbl, which would pave the way to the next support level at $38.4/bbl. This level could be tested overnight, as the API data is expected to show a second consecutive build in US crude oil stocks. The upside potential remains limited to $40.1/bbl, with an unlikely strong rally in risk assets leading to a further gain to $40.7/bbl.GOLD PRICES RISE AS DOLLAR WEAKENS AHEAD OF FOMC MEETINGDuring the first half of the day yesterday, gold prices were trading within a $1,940-1,950/oz range. However, signs of negative dollar momentum began to exert upward pressure on gold, while positive headlines emerged indicating that progress had been made toward a Covid-19 vaccine and that further stimulus could still be on the way this year, particularly from the US. This helped gold prices rally around $20/oz to as high as $1,962/oz before consolidating within a $1,955-1,960/oz range later in the day. We note that the resumed negotiations in the US Congress over additional fiscal stimulus still seem to be at an impasse and have thus provided only limited support to gold.This morning, thanks to continuing dollar weakness, gold prices rallied to just short of the $1,970/oz mark. Investor attention is now shifting toward the FOMC meeting. The Fed recently changed its monetary policy framework and is now seeking to have inflation average 2% over time, meaning it will tolerate inflation running over 2% for a while and will likely keep interest rates near zero for the next several years. At Wednesday's decision, updated economic forecasts, which will now run through 2023, should point to this, and even hint at rates around zero in 2024 and beyond. In addition, FOMC officials could bring down their long-term interest rate forecasts. This would weigh on medium- and long-term US Treasury yields and spark a moderate depreciation of the greenback, which could push gold prices back toward the $2,000/oz mark.The main items on today's data calendar are the ZEW Germany survey for September (which will be released before you receive this) and US industrial production for August. A positive economic sentiment reading in the former would give a further boost to the euro and could push gold toward technical resistance at $1,975/oz, with a break above opening a pathway to the $1,984-1,996/oz range. However, we believe that the US industrial production data is likely to beat the consensus, which would support the dollar, thus offering up headwinds for gold prices.