Commodities Daily - December 10, 2020

> Oil holds steady in face of bearish EIA inventory report as focus shifts to vaccine rollouts. Today, investors will eye the ECB decision, US November CPI data and US weekly initial jobless claims. In our view, today Brent could retest the $48.4/bbl support level, with a good chance of breaking below it and onward toward $47.9/bbl, amid deteriorating risk appetite as the Brexit and US fiscal stimulus negotiations drag on. Oil prices should be supported, however, by upbeat news on vaccine rollouts, and risk sentiment could get a boost from the ECB meeting were the bank to extend and boost the size of its PEPP, as is expected.> Gold plunges amid doubts over US stimulus; ECB in focus today. The key event today will be the ECB meeting, at which the pandemic emergency purchase program, currently set to expire in the middle of next year, may be extended to mid-2022, with the size potentially being increased from EUR1.350 trln to EUR2 trln or even more. This could put the euro under pressure, particularly if ECB President Christine Lagarde also tries to intervene verbally to blunt the European currency's recent sharp appreciation. Of course, a weaker euro would mean a stronger dollar, which would weigh on gold. Also in focus today will be the US inflation print for November. If it comes in at zero, as in October, this would increase the likelihood that the Fed will boost its purchases of long-dated Treasuries. In our view, gold is likely to retest support at $1,828/oz today, with a break below possibly causing a fall to $1,798/oz.OIL HOLDS STEADY IN FACE OF BEARISH EIA INVENTORY REPORT AS FOCUS SHIFTS TO VACCINE ROLLOUTSHaving come under pressure early yesterday from a downbeat API US inventory report, dropping to $48.5/bbl, front-month Brent began to rally and in the early European trading hours peaked at $49.55/bbl. This $1/bbl rise came after the Iraqi Oil Ministry and government officials reported that two wells in a small oilfield in northern Iraq (producing about 0.025 mln bpd) were set ablaze by explosives on Wednesday in a "terrorist attack," but they said that overall production from the field had not been affected (production from the two wells that were targeted did not exceed 2,000 bpd). Ahead of the EIA inventory report, Brent was trading near $49.3/bbl. It ended up showing a massive 15.189 mln bbl build in US crude stocks to 503.2 mln bbl last week, amid a 1.08 mln bpd increase in imports to 6.48 mln bpd and a 1.62 mln bpd decrease in exports to 1.83 mln bpd (the largest weekly decrease in exports on record). An increase of refinery inputs of 0.42 mln bpd to 14.44 mln bpd failed to offset the pressure, while crude oil production was unchanged at 11.1 mln bpd. The export slump might be explained by the closure of the Houston Ship Channel due to bad weather in the period.The EIA refined product data was also downbeat: gasoline stocks rose 4.22 mln bbl to 237.86 mln bbl and distillate stocks swelled 5.22 mln bbl to 151.1 mln bbl. Total commercial petroleum stockpiles (oil and refined products combined, excluding strategic petroleum reserves) surged 19.93 mln bbl. Gasoline demand continues to trend downward, falling below 8 mln bpd as the pandemic continues to spread. Diesel inventories swelled on the Gulf Coast and in New England, where heating oil is needed for the winter, and distillate demand fell by 0.4 mln bpd w-o-w. The refined product builds were much larger than anticipated, exacerbating pressure on gasoline refining margins, which were already down due to the significantly lower demand. Following the release, Brent plummeted to an intraday low of $48.4/bbl. But it then managed to pare the loss, supported by news flow about vaccinations beginning in the UK and the prospect of the US FDA approving a coronavirus vaccine in the US. We think oil's limited price reaction to what looked like an extremely bearish EIA report shows that oil's main driver is now the vaccination rollouts, which we believe is likely to continue for the foreseeable future. Investors seem willing to overlook the worrying short-term energy demand situation and are hoping for a swift recovery next year. Brent eventually settled yesterday at $48.86/bbl, up $0.02/bbl on the day.Today, investors will eye the ECB decision, US November CPI data and US weekly initial jobless claims. In our view, today Brent could retest the $48.4/bbl support level, with a good chance of breaking below it and onward toward $47.9/bbl, amid deteriorating risk appetite as the Brexit and US fiscal stimulus negotiations drag on. Oil prices should be supported, however, by upbeat news on vaccine rollouts, and risk sentiment could get a boost from the ECB meeting were the bank to extend and boost the size of its PEPP, as is expected.GOLD PLUNGES AMID DOUBTS OVER US STIMULUS; ECB IN FOCUS TODAYAfter trading near $1,870/oz at the start of the day yesterday, gold first slid to $1,860/oz, and then began to freefall in the early US trading hours amid a sharp correction in EUR/USD and major stock market indexes. It dropped first to $1,840/oz and later in the day briefly slid below $1,830/oz. This was partially due to the Republican leadership in the Senate stating that disagreements remain over the new stimulus package. We note, however, that the dollar made a U-turn in the evening after Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi reaffirmed their optimism about the new stimulus package, which helped push gold back toward $1,840/oz this morning. Investors have also continued to track the progress of vaccination in the UK and have been waiting to see if the FDA will approve the Pfizer coronavirus vaccine in the US, where deaths from Covid-19 rose above 3,000 for the first time yesterday, according to data from Johns Hopkins University. The UK's vaccination campaign hit a stumbling block yesterday after two people with a history of allergies experienced reactions to the Pfizer vaccine, while the US FDA will meet to discuss that vaccine today.The key event today will be the ECB meeting, at which the pandemic emergency purchase program, currently set to expire in the middle of next year, may be extended to mid-2022, with the size potentially being increased from EUR1.350 trln to EUR2 trln or even more. This could put the euro under pressure, particularly if ECB President Christine Lagarde also tries to intervene verbally to blunt the European currency's recent sharp appreciation. Of course, a weaker euro would mean a stronger dollar, which would weigh on gold. Also in focus today will be the US inflation print for November. If it comes in at zero, as in October, this would increase the likelihood that the Fed will boost its purchases of long-dated Treasuries. In our view, gold is likely to retest support at $1,828/oz today, with a break below possibly causing a fall to $1,798/oz.