The Commodities Feed: Deeper oil cuts recommended

The US Fed took emergency action yesterday, cutting rates by 50 basis points, although the move did not have the expected outcome, with equity markets selling off, whilst oil gave back much of its earlier gains and ICE Brent settled marginally lower on the day. This suggests that markets were expecting more from the Fed to help offset the economic impact from Covid-19.

What offered relatively more support to oil yesterday (compared to equity markets) was that the OPEC+ Joint Technical Committee recommended to OPEC+ to increase the level of additional cuts. This also appears to be providing some early morning strength to the oil market today.

Back in early February, the committee recommended additional cuts of 600Mbbls/d, however, it is now suggesting a cut between 600Mbbls/d and 1MMbbls/d for 2Q20. Cuts will need to at least be towards the top end of this range, as we see further downward revisions in demand growth as Covid-19 spreads. There is more evidence of the spread of the virus having an impact on demand outside of China, with media reports of a refiner in South Korea planning to cut run rates between 5-10% over March and April at one of its refineries as a result of the outbreak.

Finally, the API reported yesterday that US crude oil inventories increased by 1.69MMbbls over the week, which was less than the 3MMbbls build the market was expecting, according to a Bloomberg survey. The more widely followed EIA report will be released later today. Although given the agenda for the rest of the week, with OPEC+ meetings, the market is likely to pay less attention than usual to this report.

The US Fed's emergency 50 basis point cut did little to support base metal prices, with most metals in the complex closing lower on the day. Gold did react as one would expect following the Fed easing, with the yellow metal settling more than 3.2% higher on the day. Given the current environment and the expectation that there is more easing to come from central banks around the globe, we continue to hold a constructive outlook for gold.

Turning back to base metals, and both zinc and copper continue to see diverging trends when it comes to spot treatment charges (TCs). According to the latest data, spot TCs for imported zinc concentrate in China recorded their first decline in the last two years. We believe that part of this comes down to tighter domestic mine supply, with reported difficulties in ramping up from local mines. The average TC for imported concentrate has declined by $5/t this week to around $300/t, according to Asian Metals. Meanwhile, copper's spot TCs have continued rising and now sit just above US$71/t, providing some relief to higher-cost smelters. Although for the smelting business, sulphuric acid storage remains a big pain point in the short term, despite the fact that logistics and transportation have started to recover.