Commodities Daily - December 3, 2021

> Oil prices slide and then recover following surprising OPEC+ meeting outcome. This morning, Brent was climbing toward $71/bbl. The highlights on today's macro calendar are the November jobs report and the November ISM services index, both from the US. In our view, Brent has the potential to rise toward $72/bbl today, even if the US monthly employment report is as upbeat as expected (this would bolster expectations for a hawkish outcome to the December Fed meeting), as we think investors will be unwilling to bet against OPEC+ being ready to revisit its decision to hike supply in January at any moment.> Gold down on higher Treasury yields. Gold decreased from $1,780/oz to $1,770/oz yesterday, while the US 10y Treasury yield rose from 1.41% to 1.44%. Gold is trading near $1,775/oz as we write. Today, the market awaits US nonfarm payrolls data for November, the ISM services PMI for November and retail sales in the eurozone for October. We expect bullion to test support at $1,765/oz today.> Metals mixed with aluminum's slide standing out. Base metals traded mixed yesterday. Aluminum slid to a psychologically important support amid a surprise pickup in LME inventories. Meanwhile, thermal coal is trading sideways, though the Chinese market looks set to become more regulated amid new benchmark contract prices.OIL PRICES SLIDE AND THEN RECOVER FOLLOWING SURPRISING OPEC+ MEETING OUTCOMEYesterday, Brent plunged $5/bbl to as low as $65.7/bbl after OPEC+ decided to go ahead with the planned 0.4 mln bpd supply hike in January despite the recent price slump amid the Omicron-related demand fears. However, later in the day it rebounded back above $70/bbl, as the group formally kept its meeting open, which will allow it to make immediate adjustments if required. Brent eventually settled at $69.67/bbl, fixing $0.8/bbl above the previous settlement. The OPEC+ decision also came in spite of the fact that the Joint Technical Committee's demand and supply balances still showed hefty stock builds in 1Q22 and all of 2022. While there are rumors that the JTC lowered its 1Q22 stock build estimate from 3.1 mln bpd to 1.9 mln bpd, even the latter figure seems large enough to justify pausing the production hikes. However, we note that realistically the group will only be able to add around 0.17 mln bpd in January due to the lack of capacity in several member countries. Many reports indicate that there were wider political considerations at play that may have tipped the scales in favor of an output hike. Various media outlets have reported that several US officials visited Riyadh and the UAE this week, although it is unclear exactly what was discussed. This reporting suggests that the Biden administration and the Saudi leadership were able to bridge some of their differences, at least temporarily. We see this as being a significant factor behind Saudi Arabia's sudden willingness to keep raising output. Despite the political considerations, the group remains focused on limiting the downside risks for prices and preventing stocks from building heavily. Knowing that market sentiment is fragile due to the Omicron variant and resulting flight cancellations, the group added an unusual (and we think rather clever) statement to its formal communique, saying that it would not formally adjourn the meeting, leaving open the option to adjust its plans in the coming weeks if needed. In any case, this rather unusual move underscores the uncertainty over the current demand outlook. It also gives the group optionality and limits the downside for prices, as the possibility of a production cut still hangs over the market, which should prevent traders from shorting crude aggressively.Talks continue among the delegates about what they need to do in January. Should the impact of the Omicron variant on demand prove long-lasting and substantial, the group will react quickly and pull barrels back from the market as needed. We would not be surprised if it pushes for a pause or a cutback at the January meeting, or even earlier if needed. This morning, Brent was rising toward $71/bbl. The highlights on today's macro calendar are the November jobs report and the November ISM services index, both from the US. In our view, Brent has the potential to rise toward $72/bbl today, even if the US monthly employment report is as upbeat as expected (this would bolster expectations of a hawkish outcome to the December Fed meeting), as we think investors will be unwilling to bet against OPEC+ being ready to revisit its decision to hike supply in January at any LD DOWN ON HIGHER TREASURY YIELDSGold decreased from $1,780/oz to $1,770/oz yesterday, while the US 10y Treasury yield rose from 1.41% to 1.44%. Meanwhile, EUR/USD traded declined from 1.132 to 1.130, which created headwinds for bullion. The eurozone PPI for October showed another record increase, this time of 5.4% m-o-m and 21.9% y-o-y, obviously both significantly above expectations. Rising prices in Europe supported gold yesterday, as it creates worries that the ECB may begin to turn more hawkish, which would eventually lead to the dollar easing. However, US initial jobless claims rose by less than expected at 222k from the last record low reading at 194k (revised). This is an optimistic number, which gives hope that the labor market recovery is on track and provides the Fed grounds to be hawkish. Additional, pressure was created by fresh comments from Fed officials. Randal Quarles sees tapering QE at a faster pace as appropriate, while Raphael Bostic and Mary Daly favor ending the bond-buying program by end-1Q22. Meanwhile, the risks related to the new Omicron strain have not particularly buoyed gold. Research suggests that although the strain is three time more infectious, scientists also mention that hospitalizations in South Africa remains muted, which may be attributable a part to vaccination.During the Asian trading session today gold traded near the $1,775/oz level. Today, the market awaits US nonfarm payroll data for November, the ISM services PMI for November and retail sales in the eurozone for October. The consensus for nonfarm payrolls is 550k new jobs, which seems achievable, while unemployment is expected to decrease to 4.5%. Both of these indicators may signal a strong labor market recovery. This, in turn, could mean faster tapering, thus leading to a stronger dollar and higher Treasury yields, which would make non-yielding bullion less attractive for investors. The ISM services PMI is also expected to come in optimistic. Overall, we expect gold to test support at $1,765/oz TALS MIXED WITH ALUMINUM'S SLIDE STANDING OUTBase metals traded mixed yesterday. The 3m LME contract on copper closed higher by 0.55% (+$52/tonne from the previous day's close) at $9,496/tonne, aluminum plunged 2.42% (-$65/tonne) to $2,600/tonne, nickel was flat at $19,953/tonne and zinc ended the day off 1.76% (-$57/tonne) at $3,146/tonne.Aluminum was on the retreat yesterday following a reported 18% build in LME inventories. A sharp, 100 kt increase in stockpiles in Malaysia took traders aback as the market was considered tight. The aluminum price closed at the psychologically important level of $2,600/tonne, near its 200-day moving average, which had been a strong support recently. With China entering a period in which power consumption and emissions will be under scrutiny ahead of the Olympics, we expect aluminum, the most energy-intensive base metal, to suffer the most from supply constraints, driven by Chinese smelter closures. Inventories are likely to fall even lower, which will be supportive for aluminum prices.Thermal coal futures were almost flat yesterday. According to reports today, Chinese authorities said they would raise the long-term coal benchmark price used in contracts to up to CNY700/tonne ($110/tonne) in 2022. The decision comes after a supply disruption earlier this year that had spurred prices to reach the highs they did in October. The Chinese government seems concerned about long-term supply safety, which implies tighter control over the coal sector. With stricter regulation of the market becoming the new norm, we expect actual prices to move within a "reasonable" range of the target, which is obviously lower than current