Commodities Daily - December 21, 2020

> Oil slides on further full lockdown fears as more virulent strain spreading in UK. Today is light in terms of the economic calendar, with the oil market likely to focus on the December eurozone consumer confidence index. Investors are worried that new full lockdowns could be adopted beyond some parts of the UK (where they have been introduced over the weekend) and damage the oil demand recovery. We expect this development to push Brent to as low as $49.8/bbl today. Support should come from the fact that US Congressional leaders on Sunday finally reached a deal for a $900 bln coronavirus aid package.> Gold breaks above $1,900/oz amid US stimulus compromise and Covid-19 mutation. The new US fiscal support will boost inflation expectations and support gold as a traditional hedge against higher prices. We expect gold to firm to $1,930/oz over the near term once it has broken above resistance at $1,904/oz. The virus mutation is gold price negative on one hand as it has resulted in risk-off and dollar strengthening, but the other hand it has boosted bullion's safe-haven premium.OIL SLIDES ON FURTHER FULL LOCKDOWN FEARS AS MORE VIRULENT STRAIN SPREADING IN UKBrent was trading below $51.5/bbl on Friday morning but climbed to $52.5/bbl on the back of more positive vaccine news, with Pfizer applying for Japanese approval for its vaccine already being used in the UK and the US. Moderna's vaccine has already started shipping across the US, with 5.9 mln doses scheduled for delivery this week. The first shots of Moderna's vaccine will begin today. The Baker Hughes US active oil rig count rose yet again w-o-w, this time by five units to 263 (its highest level since May). Brent eventually settled up $0.76/bbl at $52.26/bbl.However, Brent has slipped to $50.3/bbl as we write amid news that a new, more virulent strain of the coronavirus is spreading in the UK. The UK authorities have said that there is no evidence yet that the strain causes any more severe effects. Prime Minister Boris Johnson said this strain of the virus could be 70% more infectious. It remains to be seen how effective Pfizer's coronavirus vaccine, which the UK approved for use in early December, will be against the new type of coronavirus. Oil investors fear that this will lead to new lockdowns, which would clearly slow the oil demand recovery. The British authorities on Sunday introduced stricter curbs on the movement of residents in London and almost the entire southeast of the country. A number of countries have suspended flights with the UK, including the Netherlands, Belgium, Germany, Italy, Austria, Bulgaria and Turkey, with Saudi Arabia temporarily closing its borders. New strains of the coronavirus have also been detected in South Africa, Denmark, Italy, the Netherlands and Australia, which are now at high risk of full lockdowns. Should the lockdown situation deteriorate, OPEC+ could decide to roll back its 0.5 mln bpd production increase scheduled for January. Over the weekend, Russia and Saudi Arabia reiterated their commitment to the current OPEC+ arrangements, which the Russian energy minister has said will ensure the swiftest path to stabilizing and balancing the market while demand remains volatile.Today is light in terms of the economic calendar, with the oil market likely to focus on the December eurozone consumer confidence index. Investors are worried that new full lockdowns could be adopted beyond some parts of the UK (where they were introduced over the weekend) and damage the oil demand recovery. We expect this development to push Brent to as low as $49.8/bbl today. Support should come from the fact that US Congressional leaders on Sunday finally reached a deal for a $900 bln coronavirus aid package. This week, the Christmas holidays will disrupt trading schedules and the release of various reports, including the Baker Hughes US rig count.GOLD BREAKS ABOVE $1,900/OZ AMID US STIMULUS COMPROMISE AND COVID-19 MUTATIONOn Friday, gold was trading within a $1,880-1,890/oz range, with potential gains on fiscal aid progress capped by a new stalemate in the US stimulus negotiations, as a small group of senators were preventing an agreement on the compromise bill. Additional headwinds came from news that the US had formally approved the Moderna Covid-19 vaccine for emergency distribution, which will hasten vaccinations in the US and elsewhere. Moderna's vaccine requires is slightly less difficult to store than the already approved Pfizer vaccine.One major global highlight this morning is the UK government has introduced harsher lockdowns in London and southeast England, while several EU countries have closed travel links with the UK due to reports that a more virulent strain of Covid-19 is spreading in southern England. The global market risk-off is negative for gold as the dollar is strengthening, but the other hand this is boosting gold's safe-haven premium. This type of news usually attract retail and ETF investors into gold, so if the situation deteriorates, we would expect gold to receive further support. We believe the US stimulus compromise reached yesterday is an even more important factor for gold. Congressional negotiators have struck a deal on a new fiscal stimulus package for the US. Voting in the House of Representatives, where Democrats hold the majority, will take place today. The stimulus package, the second largest in US history after the $2.3 trln deal secured in the spring, includes a one-off $600 direct payment to most Americans and the expansion of unemployment assistance programs, including an increase in benefits of $300 per week. During the first wave of the pandemic and lockdowns, more than 20 mln Americans lost their jobs, and only half of them have found work. The stimulus plan also includes $25 bln in rent compensation for affected businesses, hundreds of billions of dollars in assistance to small businesses, and funds for the nationwide vaccination program that kicked off in the US last week. This money injection will boost inflation expectations, supporting gold as a traditional hedge against higher prices. We expect gold to firm to $1,930/oz over the near term once it has broken above resistance at $1,904/oz.The Christmas holidays mean that scheduled events are growing scarcer, and volumes are set to dry up. Covid-19 headlines will of course remain the key theme. Today, eurozone consumer confidence and the Chicago Fed activity index will dominate the macro calendar. EU regulators are reviewing the Pfizer/BioNTech vaccine. US macro releases come thick and fast tomorrow and on Wednesday and will give ample opportunities for investors to react in thin markets prior to a shortened session on Christmas Eve and closures on Christmas Day.