Commodities Daily - December 15, 2020

> Oil slides on downbeat OPEC report, tightening Covid restrictions. Today, oil investors will be focused primarily on the IEA's monthly oil market report to see whether the agency lowered its estimate for oil demand next year following downward revisions from the EIA and OPEC. In our view, the price risks today are skewed to the downside, especially given the further tightening of lockdown measures. However, China's November industrial output and retail sales data this morning was fairly rosy, so any correction would probably be mild. All in all, we think Brent is likely to retest yesterday's low of $49.1/bbl at some point today.> Gold buoyed by prospects of stimulus compromise in US Congress. Today's macro agenda is uninspiring, with US November industrial production being the major highlight. The Fed meeting begins today, but the decision and commentary will come tomorrow. We think gold could break above resistance at $1,846/oz today, possibly paving the way to $1,861/oz.OIL SLIDES ON DOWNBEAT OPEC REPORT, TIGHTENING COVID RESTRICTIONSAfter trading close to $50/bbl at the start of the day yesterday, front-month Brent began to trend higher, peaking at $50.8/bbl in the early European trading hours amid the rollout of the first Covid-19 vaccine in the US and concerns over stability in the Middle East following the recent explosion on an oil tanker near the Saudi Arabian port city of Jeddah. Ahead of the release of the monthly OPEC report, Brent was weighed down by a retreat in EUR/USD, quoted near $50.3/bbl. In the report, the OPEC Secretariat yet again lowered its oil demand estimate for next year, this time by 0.37 mln bpd (following a 0.58 mln bpd downward revision last month) to 95.89 mln bpd (up from the 89.99 mln bpd it forecasts for this year). Another key highlight was that OPEC cut its 1Q21 demand forecast by a rather strong 1 mln bpd, which suggests that if OPEC+ restores output quickly this could interfere with its objective of bringing inventory levels back to normal levels. Stockpiles in developed nations remained 200 mln bbl above the five-year average in October, according to OPEC's report. We note that the 2021 non-OPEC production forecast was lowered by 0.16 mln bpd, with Russia and Latin America contributing the most to this revision, while the forecasts for China and the Middle East were raised slightly. Following the release, Brent slid to an intraday low of $49.13/bbl amid 1Q20 oversupply fears and a reported further pickup in Libyan production to 1.28 mln bpd (up from 1.25 mln bpd in late November).Yesterday's EIA drilling productivity report was more upbeat. The EIA now expects US tight oil output to drop 0.136 mln bpd m-o-m to 7.44 mln bpd in January. It expects overall US output to fall for the fourth straight month, with most of the seven major shale formations seeing a decline in January despite the recent rise in the US active oil rig count and prices. In November, the total number of drilled but uncompleted wells fell for the fourth straight month, dropping by 144 to 7,330, the lowest since November 2018. Brent eventually settled at $50.29/bbl, $0.32/bbl above the previous settlement. Another highlight yesterday was OPEC's statement that the OPEC+ Joint Technical Committee and Ministerial Monitoring Committee meetings that had been scheduled for this week have been postponed until January 3 and 4. This morning, news that London has shut down all bars and restaurants has weighed on sentiment. This was the latest example of a tightening of restrictions amid the ongoing rise in Covid-19 infections, a trend that does not bode well for fuel demand. Italy is also weighing more stringent restrictions over the Christmas holidays, while most stores in Germany have been ordered closed until January 10.Today, oil investors will be focused primarily on the IEA's monthly oil market report to see whether the agency lowered its estimate for oil demand next year following downward revisions from the EIA and OPEC. Last month, the IEA lowered its 2021 oil demand forecast by 0.12 mln bpd and said it was far too early to know how and when vaccines will allow normal life to resume, and that its forecasts did not envisage a significant impact in 1H21. In our view, the price risks today are skewed to the downside, especially given the further tightening of lockdown measures. However, China's November industrial output and retail sales data this morning was fairly rosy, so any correction would probably be mild. We also note that China's crude oil refining in November was up 3.2% y-o-y to 14.2 mln bpd (up from 14.09 mln bpd in October), a new record high. All in all, we think Brent is likely to retest yesterday's low of $49.1/bbl today.GOLD BUOYED BY PROSPECTS OF STIMULUS COMPROMISE IN US CONGRESSGold was hovering above the $1,835/oz mark yesterday morning but slid toward $1,820/oz following the start of mass vaccinations in the US, which is enabling investors to look beyond the difficult virus situation in that country, in turn reducing the uncertainty factor supporting gold. Bullion consolidated within the $1,825-1,830/oz range for the rest of the day and briefly even spiked to $1,837/oz amid reminders that Covid continues to spread. London and New York announced tighter lockdowns. Meanwhile, the Electoral College formally voted for President-elect Joe Biden, in line with the individual states' popular votes. London and Brussels yesterday agreed to "go the extra mile" to try to salvage a trade agreement.Gold is generating strong positive momentum and rallying toward $1,845/oz as we write, with support coming from the positive comments on the prospects for a stimulus compromise in the US Congress. A bipartisan group of lawmakers has delivered the details of a $908 bln relief package, splitting it into two in recognition of the deep differences between Republicans and Democrats over state aid and a liability shield for employers. More material action would impress markets and provide further support for gold. With Biden now confirmed by the Electoral College, leaders in Congress need to find a way to get one or both parts through the House and Senate before the last of the relief provisions from earlier stimulus expire at the end of the year.Gold is also benefiting from news that London has tightened restrictions, including a requirement for bars and restaurants to close, as infection rates continue to rise sharply. This will dent fuel demand in the near term. Italy is considering more stringent restrictions over the Christmas holidays, while most stores in Germany have been ordered to close until January 10. Today's macro agenda is uninspiring, with US November industrial production being the major highlight. The Fed meeting begins today, but the decision and commentary will come tomorrow. We think gold could break above resistance at $1,846/oz today, possibly paving the way to $1,861/oz.