Commodities Daily - December 23, 2021

> Oil prices rise following upbeat weekly EIA inventory report. Today, investors will eye a raft of US data, including November US personal income and spending data, durable goods orders, new home sales and weekly jobless claim data. In our view, Brent will likely break above $76/bbl on upbeat risk sentiment.> Gold advances ahead of US PCE deflator publication. Gold strengthened from $1,790/oz to $1,805/oz yesterday, while the US 10y Treasury yield eased from 1.46% to 1.45%. Gold is trading near $1,805/oz as we write. Today, the market awaits the US PCE deflator, durable goods orders and personal income and spending for November, as well as weekly initial jobless claims. We expect bullion to test support at $1,800/oz today.> Base metals higher with zinc and aluminum outperformers; iron ore set for correction. Base metals closed with gains yesterday, with energy-intensive aluminum and zinc gaining most on fears of potential further production cuts amid the ongoing power crisis in Europe. Iron ore futures are sliding as Chinese port stockpiles climb toward record highs and the market is set for a surplus.OIL PRICES RISE FOLLOWING UPBEAT WEEKLY EIA INVENTORY REPORTYesterday, Brent gained $2/bbl, rising toward $75.7/bbl after an upbeat weekly EIA inventory report, with total US crude oil and refined product stocks, excluding strategic petroleum reserves, declining to their lowest level since July 2018. The withdrawal of 2.5 mln bbl from the SPR (so far this year the US has sold 41.7 mln bbl from SPR on the market) came on top of a 4.7 mln bbl drop in commercial stockpiles. That's the biggest drop in total crude stockpiles since July. This comes even as crude exports slumped over 20% w-o-w to 2.88 mln bpd. Most of this decline can be traced to the Gulf Coast, where crude stocks fell over 3 mln bbl as refinery runs held steady while crude imports fell. Crude production slipped by 0.1 mln bpd to 11.6 mln bpd last week, after sticking at 11.7 mln bpd in the two prior weeks. The drop came despite continued growth in the number of rigs drilling for oil in the US ahead of the holidays. Cushing hub inventories rose for a sixth straight week, exceeding 33 mln bbl.Gasoline stocks swelled by a strong 5.53 mln bbl (biggest increase since June, with demand falling slightly), while distillates were up only by 0.4 mln bbl. Note that the US became a net exporter again last week, with outflows of crude and refined products exceeding inflows for the first time in five weeks. Exports of refined products jumped by more than 1.5 mln bpd, more than offsetting the fall in crude outflows. Imports of both crude and refined products also fell. Gasoline imports from Europe to the East Coast fell sharply over the past few weeks and the surge in natural gas and electricity prices across the continent may lead to further reductions. Also note that seasonal refined-product inventory builds are likely to be the norm in the next several weeks, especially in light of rising refinery runs and lower activity due to surging virus cases in the US.Oil price support is also coming from the energy crunch in Europe and disruptions to oil supply in Libya and Nigeria, while rising US home sales and consumer confidence have signaled economic strength, blunting worries about the impact of Omicron. Yesterday, front-month Brent eventually settled at $75.29/bbl, fixing $1.31/bbl above the previous settlement. This morning, Brent is trading around the $75.5/bbl mark, with South Korea to start releasing crude and oil products from its strategic reserves next month, the first major consumer to follow through on a pledge to tap emergency stockpiles as part of a US-led initiative. Today, investors will eye a raft of US data, including November US personal income and spending data, durable goods orders, new home sales and weekly jobless claim data. In our view, Brent will likely break above $76/bbl on upbeat risk LD ADVANCES AHEAD OF US PCE DEFLATOR PUBLICATIONGold firmed from $1,790/oz to $1,805/oz yesterday, while the US 10y Treasury yield eased from 1.46% to 1.45%. EUR/USD was the main driver, as it rallied from 1.128 to 1.133, creating a significant tailwind for bullion. Global risk-on sentiment saw the dollar weaken and provided support for gold. Yesterday's data was mixed for gold. Surprisingly, the third reading of 3Q21 US GDP was upgraded to 2.3% from the previous reading of 2.1%. Meanwhile, the US Conference Board consumer confidence index for December came in above the consensus, but the Chicago Fed national activity index and existing home sales (both for November) were below expectations.Gold is still trading near $1,805/oz as we write. Today, the market awaits the US PCE deflator, durable goods orders and personal income and spending for November, as well as weekly initial jobless claims. Bullion will likely come under moderate pressure today as we expect PCE inflation to come in above consensus, like the CPI and PPI inflation data for November that we saw earlier, while we expect weekly initial jobless claims to print below the consensus. In this case, we would expect bullion to test support at $1,800/oz today amid slightly elevated concerns over monetary policy tightening by the Fed. Gold is set for its first annual decline in three years. We also anticipate a slightly bearish trend for gold in 1Q22. In addition to the labor market, which appears to be staging a decent recovery, close attention will be paid to inflation. We expect inflation to ease, which will enable the Fed to stick to its current plan to tighten monetary policy. We assume that the Fed will wind up its QE program in 1Q22, causing 10y Treasury yields to climb to 1.50% by the end of the quarter and the dollar to strengthen to 1.11 against the euro, putting pressure on gold. In general, 2022 is likely to prove difficult for gold with the beginning of the next US rate hike cycle from near-zero levels. We expect bullion to average $1,780/oz in 1Q22 and $1,710/oz in 2022 as a SE METALS HIGHER WITH ZINC AND ALUMINUM OUTPERFORMERS; IRON ORE SET FOR CORRECTIONBase metals closed with gains yesterday. The 3m LME contract for copper added 0.77% (+$73/tonne from the previous day's close) to $9,607/tonne, aluminum 2.56% (+$71/tonne) to $2,825/tonne, nickel 1.71% (+$336/tonne) to $19,951/tonne and zinc 3.03% (+$104/tonne) to $3,532/tonne.Base metals extended their gains yesterday, with zinc and aluminum standing out. They are benefiting from fears over further production cuts in Europe as the energy crisis deepens. Spot natural gas prices have surged above $2,000/mcm, driving the rally in energy-intensive aluminum and zinc. There have been supply disruptions lately and European smelters now run the risk of further capacity cuts or a full shut. We might expect the same dynamics in China in 1Q22 as well, as the country is entering a period of strict limits on electricity consumption and emissions controls during the heating period and the Olympics. Thus, we still see upside for zinc and aluminum in the winter season and have them as our top picks among base metals.Meanwhile, iron ore futures in Singapore declined for a second straight day yesterday following continued growth in Chinese inventories at ports, which are inching closer to the record highs seen back in 2018. With imports from Brazil at record highs, shipments from both the Latin America region and Australia are set to grow further in December, according to Bloomberg. It appears that the increased imports have overshot Chinese steel mills' seemingly higher demand in the first part of this month or that there has been no such increase in demand from steelmakers. Nevertheless, with stockpiles almost at record levels, iron ore demand is set to shrink in 1Q22 and supplies should remain flat in 2022, meaning the iron ore market is set to see a surplus that will drive prices lower next year. We see futures averaging circa $82/tonne in