Commodities Daily - December 16, 2021

> Oil prices rise on EIA inventory report and Fed meeting results. This morning, Brent is trading around $74.5/bbl as investors await policy decisions from the BoE and ECB, along with weekly jobless claims and November industrial production data from the US. We do not expect Brent to be able to climb much higher than $75.4/bbl today, as the global coronavirus situation is likely to come back in focus with cases continuing to climb.> Gold reacts positively to Fed hawkishness. Gold rose from $1,770/oz to $1,780/oz yesterday while the US 10y Treasury yield edged up from 1.44% to 1.46%. Gold is trading near $1,785/oz as we write. Today, the market awaits the ECB monetary policy decision and plenty of macroeconomic releases. We expect bullion to test support at $1,775/oz today.> Base metals rebounding after yesterday's slide; iron ore still strong. Base metals closed lower yesterday on weak Chinese economic data and a hawkish Fed, but have rebounded this morning as yesterday's move looked overdone. Iron ore is still on the rise amid what looks set to be higher Chinese steel output in December.OIL PRICES RISE ON EIA INVENTORY REPORT AND FED MEETING RESULTSYesterday, after trading around $73/bbl for most of the day, Brent began to rally toward $74.6/bbl later in the day, as the EIA reported strong crude oil and refined product inventory draws, and as more hawkish Fed rhetoric spurred a broader rally in financial markets on speculation that the regulator will be able to slow inflation without derailing economic growth. Front-month Brent eventually settled at $73.88/bbl, $0.18/bbl above the previous settlement. The EIA reported that crude oil stocks in the US fell by a strong 4.58 mln bbl to 428.3 mln bbl, with a lot of that taking place along the Gulf of Mexico, home to the main US crude oil-exporting terminals. US crude exports rose back above 3 mln bpd as traders pushed barrels out of the country to avoid year-end taxes on inventories. US crude production stabilized at 11.7 mln bpd, with output at the largest shale play, the Permian basin, now expected to average 5 mln bpd this month, which would mark a return to pre-pandemic levels.Demand for US petroleum products, including gasoline, diesel and jet fuel, hit a record high of 23.2 mln bpd last week. Life is slowly getting back to normal as the economy continues to open up. Distillate demand was the highest since January 2003, underpinning a 2.85 mln bbl draw in inventories. Gasoline stocks fell 0.72 mln bbl, with demand rising above 2019 levels on a four-week average basis and above the five-year average on a seasonal basis. With jet fuel beginning to rebound, inventories slumped to the lowest level since 2014, as refineries are prioritizing the production of distillates over jet fuel. Total inventories (crude oil and refined products combined, excluding SPR releases) fell a very strong 15.87 mln bbl.Meanwhile, the Fed said it would double the pace at which it is tapering its bond purchases to $30 bln a month and projected three quarter-point interest-rate hikes in 2022, another three in 2023 and two more in 2024. It also flagged economic risks from the Omicron strain. The market response to the Fed so far suggests some relief from the further clarity on policy. Investors seem to be satisfied that the Fed is aware of and responding to inflation risks, though we note that the initial market reaction to Fed decisions does not always stick. It might take more time for the full picture to emerge, particularly since the economic risks from Omicron currently overshadow central bank tightening.This morning, Brent is trading around $74.5/bbl as investors await policy decisions from the BoE and ECB, along with weekly jobless claims and November industrial production data from the US. We do not expect Brent to be able to climb much higher than $75.4/bbl today, as the global coronavirus situation is likely to come back in focus with cases continuing to climb. Australia's most populous state reported a daily record for Covid-19 cases today, not long after the government loosened its long-running tight restrictions. Meanwhile, New Zealand and Indonesia reported their first cases of the Omicron variant, while South Korea is limiting gatherings as it strengthens curbs to fight a record surge in cases. Canada has also advised residents to avoid non-essential travel to limit the spread. The new strain has helped pushed daily infections in the UK to a record, and England expects hospitalizations to surge over the holidays. Cases in the US have jumped 60% since late October to an average of about 120,000 a LD REACTS POSITIVELY TO FED HAWKISHNESSGold rose from $1,770/oz to $1,780/oz yesterday while the US 10y Treasury yield edged up from 1.44% to 1.46%. EUR/USD firmed from 1.126 to 1.129, creating a tailwind for bullion. Yesterday's Fed meeting was less hawkish than the markets expected. The Fed decided to double the pace of tapering from $15 bln to $30 bln, signaling that QE will be over in March 2022. Additionally, according to so-called "dot plot," the FOMC committee expects three 0.25% rate hikes next year. Another key signal came from the economic projections, which indicated that inflation pressure should ease in 2022, with the PCE deflator sliding from 5.3% in 2021 to 2.6% by the year-end and GDP expected to reach 4% next year. The press conference with Fed Chair Jerome Powell didn't bring any further hawkish signals. Powell mentioned that inflation is lasting longer and is running higher than initially projected, but he said he expects it to decline closer toward the 2% long-run target next year, adding that the labor market has yet to reach levels consistent with the committee's assessment of maximum employment. This indicated that the Fed still doesn't see the need for an immediate hawkish response to higher prices and would prefer to use smooth monetary policy adjustments, while fears over an aggressive response from the Fed to high inflation readings have now disappeared. Overall, the market reaction created support for gold, as the dollar retreated. Moreover, US retail sales for November increased by 0.3%, significantly below the consensus forecast of 0.8%, which also helped bullion to climb higher.Gold is trading near $1,785/oz as we write. Today, the market awaits the ECB decision and a press conference by President Christine Lagarde. On the data side, there are plenty of macro releases, including preliminary December Markit PMIs for the eurozone and the US, the Philadelphia Fed manufacturing survey for December, and US building permits and housing starts for November. Yesterday's momentum should peter out if the ECB resumes looking dovish and given that investors will be digesting the Fed's latest statement and projections, while the US economic data is likely to indicate a strong pace of recovery. We expect bullion to test support at $1,775/oz SE METALS REBOUNDING AFTER YESTERDAY'S SLIDE; IRON ORE STILL STRONGBase metals closed in the red yesterday. The 3m LME contract for copper plunged 2.26% (-$212/tonne from the previous day's close) to $9,200/tonne, aluminum slid 1.20% (-$32/tonne) to $2,597/tonne, nickel dropped 1.89% (-$369/tonne) to settle at $19,116/tonne and zinc fell 1.00% (-$33/tonne) to settle at $3,272/tonne.The plunge in quotes started yesterday morning as investors were assessing Chinese economic data, which showed that the top global metals consumer is still seeing an economic slowdown and that additional fiscal and monetary stimulus might be needed to get growth back on track. Following this, metals quotes traded sideways as the markets awaited the Fed decision. The Fed took a rather hawkish stance, which dragged metals lower in evening trading, though such a stance had been more than expected by the markets and had already been partly priced in to quotes. Today, metals are paring their losses, surging back to the technical levels where they have been trading at for a long time. The tightness in the metals markets is likely, in our view, to keep prices at current levels.Iron ore futures climbed higher yesterday on signs that Chinese steel production could see an uptick in December. Crude steel production in the first third of December rose 12% versus the same period in November, according to China Iron and Steel Association. Indeed, the last month of the year is a seasonally stronger period versus the usually weak November, while we think the m-o-m increase is likely to be stronger than usual this year, as steelmakers seem to have overdone output cuts in September-November. In addition, China is more than in line with its target of keeping annual steel output below the 2020 level. However, as we have mentioned previously, we are entering a period of strict curbs on the Chinese steel industry that will last through 1Q22 - this is likely to put a lid on iron ore prices in the medium term, although more supportive monetary and fiscal policy in China should keep the quotes from a hard