Commodities Daily - December 2, 2021

> Oil prices slide deeper ahead of OPEC+ output decision. Investors are eying OPEC+ decision today on supply policy for January. With crude already in a bear market as Omicron imperils demand, traders are widely expecting the producer group to defer the planned modest increase in output. In our view, the mix of uncertainty and differing views at the OPEC+ meeting could result in lengthy deliberations, but we think that a pause in the output increase will eventually win support as the middle-ground option. We think this would support Brent toward $71/bbl later in the day today. > Gold slightly higher despite strong payrolls. Gold moderately rose from $1,775/oz to $1,780/oz yesterday, while the US 10y Treasury yield slid from 1.45% to 1.41%. Gold is trading at $1,775/oz as we write. Today, the market awaits eurozone PPI data for October and US weekly initial jobless claims. We expect bullion to trade in a tight corridor $1,775-1,790/oz level today.> Base metals treading water; met coal on the rise again amid Omicron-related supply concerns. Trading in base metals has been relatively subdued as investors await clarity on the Omicron strain and the upcoming Fed meeting. The uptick in met coal prices has accelerated due to the threat of supply disruptions following the emergence of the Omicron variant.OIL PRICES SLIDE DEEPER AHEAD OF OPEC+ OUTPUT DECISIONYesterday, after rising $3/bbl toward $72.9/bbl, front month Brent slid to as low as $68.1/bbl, as the Omicron variant continued to worry investors. A first case was detected in California, while South Africa's Covid-19 cases doubled from Tuesday. Additional price pressures also came after Fed Chairman Jerome Powell reiterated that the bank must remain vigilant against inflation, while investors were also digesting a mixed EIA report. Brent eventually settled at $68.87/bbl, $0.36/bbl below the previous settlement. US inventories of crude oil fell 0.91 mln bbl, as refineries complete seasonal maintenance and raised their inputs for the sixth consecutive week. Crude oil exports, which rose a bit w-o-w, also contributed to a draw, helping to offset the impact of higher production and imports.Gasoline inventories rose for the first time in eight weeks (+4 mln bbl), as demand historically wanes during the winter and high prices at the pump may have started to bite. Although demand declined, it is still just shy of 2019 levels on a four-week basis. It is unclear how the Omicron strain may impact demand moving forward. Exports of gasoline rose to their highest levels since mid-August, as Latin American countries ended lockdowns. The increase in exports may be a cause of concern for the Biden administration amid rising retail prices at the pump. Distillate stockpiles rose by 2.16 mln bbl and even with the added barrels stockpiles are still well below the five-year average. Diesel demand has surged this year as the pandemic boosted electronic commerce and a large portion of Americans began working from home. Jet fuel demand on a four-week rolling basis is the strongest it's been since September, which is no surprise given all of the traffic seen at American airports over Thanksgiving. Nevertheless, Covid-19 once again poses a threat to demand as countries may impose travel restrictions as they seek to understand the impact of the new strain. This morning, Brent rose toward $69.9/bbl before easing to $69.3/bbl. Investors are eying the OPEC+ decision today on supply policy for January. With crude already in a bear market as Omicron imperils demand, traders are widely expecting the producer group to defer the planned modest increase in output. OPEC+ delegates will debate three options for January production quotas: go ahead with the planned 0.4 mln bpd increase, pause the hikes, or even cut output. There is less certainty about this meeting than for any OPEC+ gathering since July. Much of this is due to the emergence of Omicron and the lack of clarity on how it will impact demand. Many have assumed a worst-case scenario, leading to a week of hefty selloffs punctuated by tepid and short-lived rallies. In our view, the mix of uncertainty and differing views at the OPEC+ meeting could result in lengthy deliberations, but we think that a pause in the output increase will eventually win support as the middle-ground option. We think this would support Brent toward $71/bbl later in the day LD SLIGHTLY HIGHER DESPITE STRONG PAYROLLSGold moderately rose from $1,775/oz to $1,780/oz yesterday, while the US 10y Treasury yield slid from 1.45% to 1.41% and EUR/USD dropped from 1.134 to 1.132. Strong US macro data and the Fed having reiterated its hawkish view tried to push gold lower, but lingering Omicron-related risks prevented bullion from falling below support at the $1,775/oz level. ADP private payrolls for November, the main proxy ahead of tomorrow's labor market data, printed 534k, which is above the 525k expected. The labor market remains one of the main targets for the Fed and a recovery there may augur a more hawkish stance. Additionally, the ISM manufacturing PMI for last month rose to 61.1, above the 60.8 registered in October and more or less in line with the consensus signaling strong output from the manufacturing sector. On his second day of testimony in Congress, Fed Chairman Jerome Powell generally reiterated his increasingly hawkish view of monetary policy, saying that the risk of persistently higher inflation had increased. That created headwinds for gold as pandemic-era stimulus may be removed earlier than expected. Meanwhile, a case of the new Omicron strain has been recorded in the US, which has created worries that it may lead to a new bout of economic slowdown. This supported bullion yesterday. Gold traded near $1,775/oz during Asian trading today. Meanwhile, the market awaits eurozone PPI data for October and US weekly initial jobless claims. After significant pressure on gold in recent days it remains above support at the $1,775/oz level, which may signal that today, given the limited macro releases, it will likely stay above that level. However, competing forces - the economic recovery and Fed hawks on one side and Omicron strain on the other - will play tug-of-war with gold. Given this, we expect bullion to trade in a tight $1,775-1,790/oz corridor SE METALS TREADING WATER; MET COAL ON THE RISE AGAIN AMID OMICRON-RELATED SUPPLY CONCERNSMost base metals closed flat or slightly higher yesterday. Although three-month LME contracts on aluminum managed to rise 1.50% (+$39/tonne from the previous day's close) to $2,665/tonne, nickel rose only 0.25% (+$49/tonne) to $19,946/tonne, while copper and zinc were flat at $9,444/tonne and $3,203/tonne, respectively.Copper, which has retreated from its October peak amid mounting fears over the slowdown in China and faster QE tapering by the Fed, was stuck near support at its 200-day moving average. While the Omicron variant has also been weighing on prices, the still-tight supply in the copper market - even after the recent rise in inventories - is likely to keep prices resilient in the months to come. Some Chinese smelters are probably ramping up in order to meet their annual targets before the end of the year, which we think might fuel demand for copper, while additional tailwinds for prices are coming from Latin America, where political uncertainties threaten around 30% of global supply.While thermal coal quotes seem to be in a downward trend (at least for now), there are some segments in the coking coal market that are moving in the opposite direction. For example, the most actively traded coking coal futures in Dalian have climbed 12% over the last three days to $312/tonne, as there is a serious risk of another disruption in Chinese imports from neighboring Mongolia. The Omicron variant has forced Chinese authorities to halt railway crossings for non-container goods in Inner Mongolia, the province where coal enters the country from Russia and Mongolia. The Covid-19 pandemic had already been causing serious disruptions in shipments of high-grade coking coal to China since the ban on imports from Australia went into effect back in 2020. The new threat to supply comes right when steel mills' demand for iron ore and coking coal is picking up. China's steel mills are ramping up production in December (already a seasonally strong month) after overreacting to the mandated output cuts in September and October. With China still prioritizing domestic thermal coal ahead of the heating season, a drop in imports due to the Omicron strain might provide further support for coking coal in the weeks to come. In 1Q22, we expect the downward trend to resume, as the closure of steel mills prior to the Olympics will put a lid on coal