Commodities. Commodities Daily - February 13, 2018

> Oil tumbles following OPEC and EIA productivity report releases; IEA report eyed. After surging by around $1.5/bbl to $64.3/bbl early yesterday on a weaker dollar (at the time EUR\USD fell just short of breaking above 1.23 from 1.225 earlier in the day), the front month Brent contract has started to retreat and prior the OPEC monthly report release was trading around the $63.7/bbl mark as the dollar has started to strengthen. Following the release and before the EIA productivity report came out, Brent slid by $0.5/bbl; after the EIA data, it fell another $0.6/bbl to eventually settle at $62.59/bbl, $0.2/bbl below the previous settlement. It is also important to note that late yesterday Brent broke its recent strong correlation with the dollar: it lost around $0.9/bbl at the same time as the dollar was weakening. This continued in Asian trading today where EUR\USD eventually broke above 1.23 (bouncing back from an intraday low yesterday of 1.2237), whereas Brent was unresponsive to these gains, hovering steadily just below $63/bbl.
The key bearish highlight of the OPEC monthly report was a strong upward revision (the third consecutive revision higher) to the non-OPEC supply growth projection this year, which now stands at 1.4 mln bpd y-o-y (up from the previous 1.15 mln bpd). The bulk of difference is attributable to the US, for which growth is now expected at 1.3 mln bpd y-o-y from the previous 1.14 mln bpd. However, OPEC also raised its 2018 global demand growth forecast, which now stands at 1.59 mln bpd (up from the previous estimate of 1.52 mln bpd). OPEC's production was almost unchanged m-o-m in January and estimated at 32.3 mln bpd. OPEC estimated total OECD inventories at 109 mln bpd above the five-year average in December. This is down from the 133 mln bbl in November. We note that the IEA has so far maintained a more bearish view. Its previous forecast called for non-OPEC output growth of 1.68 mln bpd in 2018 and global demand growth of just 1.26 mln bpd y-o-y. Its latest report is expected today at 12:00 Moscow time. The latest EIA drilling productivity report, which was released last night, was rather bearish too. It sees US tight oil production increasing by 0.11 mln bpd m-o-m in March to reach 6.76 mln bpd (similar to what was seen last month).
Today, the IEA's monthly report should be the determining factor for sentiment, especially given the latest decoupling of Brent with the dollar. In our view, the key figure to watch will be the global demand estimate and whether the IEA maintains its bearish stance. We think that it is likely to revise its previous estimate higher, which could push Brent closer to $64/bbl today. We do not expect the IEA to make a significant revision to non-OPEC supply growth estimate this year, given the already rather optimistic figure.
> Gold supported by weaker dollar as equities continue to recover. After trading sideways within a $1,315-1,325/oz range early yesterday, gold started to shift closer to the upper end of this range later in the day and eventually broke above $1,325/oz this morning. Gold's momentum has come on the back of dollar weakness fueled by a reversal in the stock markets. The S&P 500 closed higher for the second day straight yesterday, notching a 1.4% gain. Amid the dollar's slide, EUR/USD broke above 1.23 yesterday. The last time this level was breached, back in late January, gold was trading at around $1,340/oz. This is because Treasury yields were notably lower at the time; their climb higher over the past five trading sessions has hindered gold's ascent. Today's schedule is rather quiet. Investors will likely bide their time until tomorrow, when US retail sales and CPI data comes out. Our FX team expects US stocks to carry on the positive momentum, which would pressure the dollar, pushing EUR/USD to 1.235 and perhaps lifting gold above $1,330/oz into a $1,330-1,335/oz range later in the day.
> Steel: Tangshan to extend winter steel output cuts. Tangshan, a city located in the Hebei province and which accounts for around 12% of China's crude steel output, announced that starting on March 15 (the official end of winter cuts), the local government will carry out what it is calling "differentiated steel output controls," essentially meaning that some output cuts could be prolonged. According to SBB Plats, the mills were requested to submit their output plans by February. Subsequent steps will be disclosed later and will be based on the locations of the particular mills and weather conditions.
Although it is too early to provide any estimates on the potential capacity cuts as a result of these additional measures, we believe that the news confirms yet again that the Chinese government is committed to going "green and clean" and that its focus on environmental standards will only continue to grow. The next National People's Congress is scheduled to take place on March 5, and this could be a good occasion for the government to tout the results of the winter steel and aluminum capacity cuts, as well as steel induction furnace closures. It could also indicate whether the cuts will be repeated next winter and what measures might be taken throughout this year. This would support sentiment and encourage restocking.