Commodities Daily - September 16, 2020

> Oil rises ahead of US retail sales, EIA inventories, Fed meeting results. Today, ahead of the EIA inventory report, investors will be digesting US retail sales data, but the main focus will be on Fed Chairman Powell's statement following the FOMC meeting. US retail sales may disappoint as traditional stores see reduced demand, an outcome that would weigh on the dollar, thus supporting oil prices. In light of last night's API inventory data and given that US refiners are back online after Hurricane Laura, we expect the EIA to show a crude stock draw of around 4-5 mln bbl. How oil prices would react to this would depend largely on whether the crude draw outweighs the likely buildup in total refined products. Given this and also a likely dovish statement by Powell later in the day, we think the risks for oil prices today are skewed to the upside and see Brent as likely to first break through, and then consolidate above, the $41.2/bbl technical resistance that it failed to breach this morning. After this, it could target $42.1/bbl, although resistance at $41.5/bbl stands in the way first.> Gold prices dip yesterday in the lead-up to today's Fed decision. The Fed decision at 21:00 Moscow time is today's main event. The markets are expecting the US regulator to send a dovish message. Investors' focus will be on the Fed's long-term projections and its so-called "dot plot," which is likely to show that FOMC officials have lowered their long-term interest rate forecasts, which would provide assurance that interest rates will remain near zero for the next several years as the US economy continues to recover from the consequences of the coronavirus epidemic. This, in our view, could open the path for gold to test the crucial $2,000/oz mark, which some see as the dividing line between bear and bull territory. However, gold would need to break technical resistance at $1,973/oz first.OIL RISES AHEAD OF US RETAIL SALES, EIA INVENTORIES, FED MEETING RESULTSYesterday, ahead of the IEA monthly report, front-month Brent was trading around $39.6/bbl. As expected, the IEA cut its 2020 global demand estimate for the second month in a row, this time by 0.25 mln bpd. It now sees demand averaging 8.43 mln bpd lower this year at 91.70 mln bpd (down from its previous forecast of 91.95 mln bpd). However, the 2021 demand growth estimates were left unchanged. Also bearish was an upward revision to non-OPEC supply this year, driven by a revision for the US. The estimate for 2020 demand for OPEC crude was cut 0.46 mln bpd versus the previous estimate. This was in line with the monthly OPEC report released on Monday and the EIA monthly report last week, so it had a limited effect on oil prices. A few months ago, the oil demand outlook for this year was more upbeat, which OPEC+ likely took into account when deciding to raise output in August. However, the latest downward revisions to the demand outlook indicate that the group likely misjudged how things with demand would play out. This will be discussed at tomorrow's JMMC meeting. During trading in Europe, Brent began to climb, mirroring the FTSE 100. The uptick in risk appetite was attributable to the German ZEW investor sentiment index strongly beating the consensus despite Brexit and Covid-19 headwinds. A brief dip in oil prices ahead of the Wall Street open owed to US industrial production missing expectations with a modest increase of 0.4% in August (far weaker than in previous months, when factories were coming back to life). Subsequent oil price gains were attributed to comments by the CEO of Vitol, the world's biggest independent oil trader, who said that he sees oil inventories drawing through year-end. This was a more bullish view of the market than that offered up by Trafigura just a day earlier. Brent eventually settled at $40.53/bbl, fixing $0.92/bbl above the previous settlement.Overnight, the API reported that US crude stocks fell a sharp 9.5 mln bbl to 494.6 mln bbl last week (versus the EIA's latest 500.4 mln bbl estimate). The draw came amid a 0.64 mln bpd increase in refinery runs and 0.09 mln bpd decrease in imports. Crude stocks at Cushing dropped 0.8 mln bbl. The refined product data was mixed, showing a 3.8 mln bbl build in gasoline stocks but a 1.1 mln bbl drop in distillate inventories. The EIA inventory data is due today at 17:30 Moscow time. The Bloomberg consensus is calling for a 2 mln bbl crude stock build, a 0.6 mln bbl decrease in gasoline inventories and a 0.25 mln bbl decline in distillate stocks.Today, in the run-up to the EIA inventory report, investors will be digesting US retail sales data, though the focus is on Fed Chairman Jerome Powell's press conference after the FOMC meeting. Back-to-school season is a big test for US retailers, as virus concerns have left many schools across the US closed. Retail sales may disappoint with traditional stores seeing reduced demand, which would weigh on the dollar and support oil prices. Given last night's API inventory data and that US refiners returned to operations after Hurricane Laura, we expect the EIA to show a crude draw of 4-5 mln bbl in today's report. How oil prices would react to this would depend largely on whether the crude draw outweighs the likely buildup in total refined products. With Powell's remarks later today likely to be dovish, we think the risks for oil prices are skewed to the upside and expect Brent to break through and consolidate above $41.2/bbl technical resistance, which it failed to do this morning. It could then target $42.1/bbl, though resistance at $41.5/bbl stands in the way.GOLD PRICES DIP YESTERDAY IN THE LEAD-UP TO TODAY'S FED DECISIONDuring the first half of the day yesterday, gold extended its gains from Monday's session, rising almost $16/oz to $1,972/oz amid tailwinds from a weakening dollar and EUR/USD rising toward 1.19. However, later in the day the greenback pared its early losses and EUR/USD slid to 1.185, with a rebound in US Treasury yields and a rise in US stocks providing a boost. This, in turn, pressured gold prices, which slid to $1,950/oz as a result. One highlight yesterday worth mentioning is US House Speaker Nancy Pelosi's comment that US lawmakers remained committed to reaching a deal on economic aid for those affected by the coronavirus pandemic, even after several weeks of seemingly stalled negotiations between Republicans and Democrats. The Fed decision at 21:00 Moscow time is today's main event. The markets are expecting the US regulator to send a dovish message. Gold prices have rebounded $14/oz to $1,965/oz this morning, which we attribute to investors' growing anticipation of a dovish outcome, which would keep the dollar on the back foot, hence supporting gold prices. The Fed is unlikely to make changes to rates or its asset purchases, but it will probably formally announce its adoption of an average inflation-targeting framework. However, investors' focus will be on the Fed's long-term projections and its so-called "dot plot," which is likely to show that FOMC officials have lowered their long-term interest rate forecasts, which would provide assurance that interest rates will remain near zero for the next several years as the US economy continues to recover from the consequences of the coronavirus epidemic. This, in our view, could open the path for gold to test the crucial $2,000/oz mark, which some see as the dividing line between bear and bull territory. However, gold would need to break technical resistance at $1,973/oz first. Gold prices could also find support today from US retail sales data that is expected to be weak, thus weighing on the dollar.