Commodities Daily - December 22, 2021

> Oil prices rise ahead of EIA weekly inventory update. This morning, Brent extended the gains to reach as high as $74.60/bbl before easing back below $74/bbl. Overnight, the API reported inventory draws for US crude oil (-3.67 mln bbl) and distillates (-0.85 mln bbl) last week, while gasoline stocks were up (+3.70 mln bbl). Today, investors will eye the EIA weekly inventory report and US December consumer confidence. We think Brent is likely to retest the $74.60/bbl barrier and possibly even rise to $75/bbl.> Gold steady amid limited triggers. Gold traded sideways near $1,790/oz yesterday, while the US 10y Treasury yield rose from 1.43% to 1.47%. Gold is trading near $1,790/oz as we write. Today, the market awaits the Chicago Fed National Activity Index for November, US existing home sales for November and Conference Board consumer confidence for December. We expect bullion to trade in a $1,780-1,795/oz corridor today.> Base metals higher on a handful of factors; Europe in throes of energy crisis. Base metals closed in the black yesterday as news from the US and expectations for even more easing of monetary policy in China next year support the demand outlook. Europe is experiencing an energy crunch that offers upside potential for a number of base metals this winter.OIL PRICES RISE AHEAD OF EIA WEEKLY INVENTORY UPDATEYesterday, after sliding to an intraday low of $71.24/bbl at the start of the European session, Brent began to generate positive momentum and rose toward $74.30/bbl in the late US session after UK Prime Minister Boris Johnson said new restrictions before Christmas were not planned. Price volatility has been picking up as the market tries to assess the impact of the new virus strain, with price moves amplified by low end-of-year trading volumes. Tailwinds also came against the backdrop of surging natural gas and power prices in Europe, the former nearing $2,200/mcm. The energy crisis worsened in the last several days as France; usually an exporter of power, has been seeking imports and restarted fuel-burning generators after the country's top power utility, Electricite de France, halted four nuclear reactors accounting for 10% of the country's nuclear capacity, which strained power grids amid cold weather. Around 30% of France's nuclear capacity will be offline in the coming weeks. To make matters worse, Germany is closing almost 50% of its nuclear capacity before the end of the year. The power shortages mean Europe needs to burn more gas just as Russia has signaled its supply will remain capped next month. Russian gas flows to Germany via a key route dropped to zero and are instead being shifted to Poland, according to network operator Gascade, which is likely to continue today. Lower supplies to Germany will force Europe to keep withdrawing gas at high rates from its already-depleted storages, risking a prolonged deficit well into next winter. Also note that Europe's deepening diesel shortage, exacerbated by the ongoing power crunch, is getting no relief from US Gulf Coast refiners, which are prioritizing domestic demand and buyers in Latin America. Yesterday, front-month Brent eventually settled at $73.98/bbl, fixing $2.46/bbl above the previous settlement.This morning, Brent extended the gains to reach as high as $74.60/bbl before easing back below $74/bbl. Overnight, the API reported inventory draws for US crude oil (-3.67 mln bbl) and distillates (-0.85 mln bbl) last week, while gasoline stocks were up (+3.70 mln bbl). Today, investors will eye the EIA weekly inventory report and US December consumer confidence. We think Brent is likely to retest the $74.60/bbl barrier and possibly even rise to $75/bbl as the EIA data is expected to be largely upbeat, showing another large crude stock draw, a gasoline build and a large distillate drop. As for the consumer confidence data, we note that inflation concerns crimped US consumer confidence in November, though perceptions of the labor market remained upbeat, which supported robust retail spending in the first two months of LD STEADY AMID LIMITED TRIGGERSGold traded sideways near $1,790/oz yesterday, while the US 10y Treasury yield rose from 1.43% to 1.47%. EUR/USD remained steady near 1.128. Gold remains in a narrow rage ahead of tomorrow's PCE inflation print and thin trading during the final week before the holidays. The eurozone consumer confidence index for December came in at -8.3, in line with the consensus. This had little impact on bullion. Omicron risks remain present: any new lockdowns could further delay monetary policy tightening by the Fed and other major central banks. However, these risks slightly abated yesterday. US President Joe Biden said that it may be appropriate to lift the travel ban for southern African countries where the new strain was initially identified. In the UK, Prime Minister Boris Johnson said he didn't plan to impose new restrictions before Christmas. Moreover, quarantine time in the UK for those who test positive for Covid-19 has been reduced to only seven days. Overall, these headlines helped to provide risk-on sentiment for global markets as the S&P 500 rose for the first time in three days, meaning the appeal of gold fell slightly. During today's Asian session gold is still near the $1,790/oz level. Today, the market awaits the Chicago Fed National Activity Index for November, existing home sales for November in the US and Conference Board consumer confidence for December. These releases will be in focus ahead of tomorrow's PCE inflation print. The consensus suggests mixed results for today's releases. In that case and given the lower volatility ahead of the holidays we would expect bullion to try to consolidate near current levels in the $1,780-1,795/oz SE METALS HIGHER ON A HANDFUL OF FACTORS; EUROPE IN THROES OF ENERGY CRISISBase metals closed in the black yesterday. Three-month LME contracts on copper were up 0.93% (+$87 from the previous day's close) to $9,534/tonne, aluminum added 3.11% (+$83) to $2,754/tonne, nickel was up 1.42% (+$275) to $19,615/tonne, while zinc surged 2.18% (+$73) to settle at $3,428/tonne.Promising Omicron treatments, expectations of a further easing of monetary policy in China and high European electricity prices continued to drive markets yesterday. Regarding the treatments, the US's FDA is set to authorize two pills to treat Covid-19 as soon as this week. Meanwhile, also supporting sentiment are renewed hopes for getting the Build Back Better bill through Congress after Joe Biden said he might eventually get support from Joe Manchin on his plan. Likely further accommodative monetary policy steps from China are also contributing to the positive outlook: the consensus expects more interest rate cuts next year.Finally, an energy crisis in Europe is in full swing, as natural gas and electricity prices climb to new highs. France is currently the epicenter of the crisis. Exacerbating matters is the fact that almost 30% of the country's nuclear power will be offline at the beginning of January, meaning that the energy market is now more than ever at the mercy of the weather. Without a boost of supply from abroad, Europe runs the risk of even more severe energy conditions this winter, which might lead to further closures of metal smelters. Zinc and aluminum are two metals that likely stand to benefit if more production curbs occur amid the energy crunch. Our optimistic scenario implies zinc hitting $3,700/tonne this winter if all of the upside risk factors