Commodities Daily - September 24, 2020

> Oil slides following Wall Street slump and despite upbeat EIA inventory report. US weekly initial jobless claims and new home sales data for August are due today, while Fed Chairman Powell will deliver his quarterly CARES Act report to Congress. The US data is likely to be upbeat, providing further support for the dollar and pressuring oil. Overall, we think the risks for oil remain skewed to the downside amid positive dollar momentum and tumbling stock markets, and today we expect Brent to break support at $41.1/bbl, which would open the way to the $39.4-40.4/bbl technical range.> Gold extends losses as dollar strengthens, real Treasury yields rise and inflation expectations drop. Like for oil, we think that the risks for gold are still skewed to the downside amid the dollar momentum. We see gold set to break through technical support at $1,855/oz, which will open the path toward the next support level of $1,835/oz.OIL SLIDES FOLLOWING WALL STREET SLUMP AND DESPITE UPBEAT EIA INVENTORY REPORTBrent gained around $0.7/bbl and was hovering below the $42/bbl mark ahead of yesterday's EIA report amid positive momentum on the FTSE 100, as new coronavirus restrictions in the UK ended up being not as drastic as some had feared. Furthermore, the IHS Markit eurozone manufacturing PMI rose from 51.7 to 53.7 in September, which is supportive for oil. The German economy led the way, though as a whole the economic recovery in the eurozone took a hit in September (the composite PMI fell for a second straight month) following the rise in coronavirus cases. The manufacturing gains were offset by a downturn in the service sector. Later on, the EIA report indicated a 1.64 mln bbl drop in US crude oil stocks to 494.4 mln bbl amid a 0.43 mln bpd increase in exports to 3.02 mln bpd, a 0.12 decrease in refinery inputs to 13.37 mln bpd and a 0.2 mln bpd decrease in production to 10.7 mln bpd on the back of bad weather on the Gulf Coast. A 0.16 mln bpd increase in imports to 5.17 mln bpd was insufficient to offset the overall draw. Inventories at Cushing, the WTI delivery hub, were almost unchanged at 54.28 mln bbl. The refined product data provided the main bullish highlight of the report, with gasoline stocks falling 4 mln bbl to 227.5 mln bbl and distillate stocks easing 3.36 mln bbl to 175.9 mln bbl. Total commercial petroleum stockpiles (oil and refined products combined, excluding strategic petroleum reserves) fell 7.5 mln bbl as a result. Following the release, Brent surged to as high as the $42.6/bbl mark, as the crude stock draw reinforced investor belief that the inventory overhang continues to clear as demand normalizes. The gasoline draw brought stockpile levels back to within a more normal range for this time of year (they were even lower than in the same weeks of 2018 and 2019). This was largely thanks to very low production, with the four-week moving average for demand remaining down y-o-y by around 0.9 mln bpd since early July. Bloomberg has reported that this was the equivalent of taking more than 1 mln pickup trucks off the roads. Later in the day, a strong stock market correction during the Wall Street session amid repeated Fed warnings about the fragility of the US (and global) economic recovery combined with waning hopes for new fiscal stimulus pressured Brent back toward $41.5/bbl, and it eventually settled at $41.77/bbl, up $0.05/bbl on the day.US weekly initial jobless claims and new home sales data for August are due today, while Fed Chair Powell will deliver his quarterly CARES Act report to Congress. The US data is likely to be upbeat, providing further support for the dollar and pressuring oil. Overall, we think the risks for oil remain skewed to the downside amid positive dollar momentum and tumbling stock markets, and today we expect Brent to break support at $41.1/bbl, which would open the way to the $39.4-40.4/bbl technical range.GOLD EXTENDS LOSSES AS DOLLAR STRENGTHENS, REAL TREASURY YIELDS RISE AND INFLATION EXPECTATIONS DROPYesterday, after trading near the $1,900/oz mark, gold prices began to fall toward $1,880/oz, where they failed to consolidate, and ended up dropping to $1,860/oz later in the day. This latest tumble came as investors ran for cash amid the S&P 500 dropping 2.4% to 3,237 and the NASDAQ Composite 3.0% to 10,633. The main catalysts were Fed warnings about the fragility of the US (and global) economic recovery, together with waning hopes for a new fiscal stimulus bill passing Congress anytime soon (Capitol Hill is increasingly distracted by an unanticipated battle to fill an empty Supreme Court seat). As the prospects for additional fiscal stimulus have darkened, inflation expectations have dropped and the real 10y Treasury yield has risen, the latter traditionally being among the strongest negative factors for gold.Today, investors are eyeing US weekly initial jobless claims, US new home sales for August and the comments of Fed Chairman Jerome Powell and Treasury Secretary Steven Mnuchin before the Senate Banking Committee (they are to give a quarterly report on the March fiscal stimulus known as the CARES Act). Jobless claims are likely to have continued gradually declining last week, probably meaning support for the dollar today and headwinds for gold. (However, the overall recovery in jobless claims seems to be losing momentum, and investors seem to believe that further fiscal stimulus is needed to support jobs and income.) New home sales for August are also likely to be upbeat, which would also be supportive for the greenback, as housing demand remains robust amid low mortgage rates (though sales might fall short of the surge in July). As for Powell and Mnuchin, we note that a very small fraction of the Fed's Main Street lending facilities initiated under the CARES Act has been used, an area where Treasury, Congress and the Fed might be able to work together to make changes in the program's rules. Overall, we think that risks for gold are still skewed to the downside amid the dollar momentum. We see gold set to break through technical support at $1,855/oz, which will open the path toward the next support level of $1,835/oz.