Commodities Daily - December 7, 2021

> Oil prices rise as fears over Omicron abate. This morning, Brent is hovering below the $74/bbl mark. China's oil imports rose to a three-month high in November (after refiners were allocated new import quotas), while the overall exports of goods hit a record high as external demand surged ahead of the year-end holidays. Today, investors will primarily eye the monthly EIA oil market report. We think Brent is likely to continue its gradual recovery, targeting the $74.5/bbl mark, amid cautious Omicron-related optimism.> Gold holds steady while Treasury yields climb. Gold traded sideways around the $1,780/oz mark yesterday, while the US 10y Treasury yield rose from 1.35% to 1.45%. Gold is trading near $1,780/oz as we write. Today, the market awaits the ZEW economic sentiment survey for the eurozone in December. We expect bullion to trade in a $1,775-1,795/oz corridor today.> Base metals mixed; Chinese coal market moving toward balance; iron ore up on Chinese stimulus rhetoric. Industrial metals closed mixed yesterday, supported by Chinese stimulus rhetoric and a cut to the reserve requirement ratio. Meanwhile, the latest Chinese trade data has come out above expectations, with surging Chinese coal imports increasing the chances of a balanced Chinese market in December.OIL PRICES RISE AS FEARS OVER OMICRON ABATEYesterday, Brent rallied almost $3.6/bbl to as high as $73.8/bbl amid broader stock market gains on reports that early cases of the Omicron Covid-19 variant have been fairly mild and are not leading to a surge of hospitalizations, which eased concerns about a possible blow to demand. However, although it appears that hospitals haven't been overwhelmed so far, some nations have still implemented restrictions on travel that are expected to crimp jet fuel demand. If the Omicron fears in fact prove to be overblown, there will be upside to prices, as the fundamentally justified Brent price is still around $83/bbl, in our view. However, the market will want to wait and see what OPEC+ does in January and will want proof that the political considerations (stemming from US pressure) at the OPEC+ meeting last week was a one-off, which we believe it was (for more details, see our post OPEC+ meeting recap in last Friday's daily). We will likely know the answer to both the Omicron and OPEC+ issues by early January, when Brent should be able to push beyond its 100-day moving average and toward the $77-78/bbl range. For now, there is too much uncertainty in the market and we are too close to the end of the year, meaning that traders will probably opt to stay on the sidelines for the next few weeks. The latest slump in open interest in both Brent and WTI is a reflection of this.This morning, Brent is hovering below the $74/bbl mark as government data showed that China's oil imports rose to a three-month high in November (after refiners were allocated new import quotas), while the overall exports of goods hit a record as external demand surged ahead of the year-end holidays. Note, however, that oil demand in China is very likely to be weaker at the start of next year compared to the last months of 2021 due to Beijing tightening rules and extending industrial production curbs until March 2022 to ensure blue skies for the Winter Olympics in February. Today, investors will primarily eye the monthly EIA oil market report. We think Brent is likely to continue its gradual recovery, targeting the $74.5/bbl mark, amid cautious Omicron-related LD HOLDS STEADY WHILE TREASURY YIELDS CLIMB Gold traded sideways around the $1,780/oz level yesterday, while the US 10y Treasury yield rose from 1.35% to 1.45% and EUR/USD weakened from 1.132 to 1.128, creating headwinds for bullion. Bullion held steady as investor fears over the new Omicron strain are easing while the Fed is talking up aggressive monetary policy tightening. In South Africa, which is where the Omicron strain emerged, the rise in new Covid cases has not overwhelmed hospitals. Initial statistics from the epicenter of the Omicron variant spread look "a bit encouraging regarding severity," according to US President Joe Biden's chief medical adviser. The Biden administration is also re-evaluating the current ban on flights to some southern African countries as more information becomes available. Next week's FOMC meeting promises to provide more hawkish signals, including faster tapering of the bond-buying program, and convey new FOMC members' expectations about further rate hikes and other economic projections. Overall, we believe that the Omicron risks, which have created some support for bullion, are disappearing and the Fed is likely to exhibit less concern over Omicron as part of its monetary policy tightening.Gold remains near $1,780/oz as we write. Today, the market awaits the ZEW economic sentiment survey for the eurozone in December and the US goods and services trade balance for October. Positive data from the eurozone could create a counterweight for dollar strengthening and support bullion. However, investors await US CPI data later this week, which will likely keep bullion under pressure as it means the Fed will likely deliver faster monetary policy tightening. We expect bullion to trade in a $1,775-1,795/oz corridor SE METALS MIXED; CHINESE COAL MARKET MOVING TOWARD BALANCE; IRON ORE UP ON CHINESE STIMULUS RHETORICBase metals closed mixed yesterday. The 3m LME contract for copper was up 0.92% (+$87/tonne from the previous day's close) at $9,505/tonne, aluminum dropped 1.33% (-$35/tonne) to $2,528/tonne, nickel fell 1.05% (-$210/tonne) to settle at $19,820/tonne, while zinc was flat at $3,163/tonne.The mixed dynamics were driven by uncertainty over the Omicron variant. Metals quotes were supported by the PBoC decision to cut the reserve requirement ratio and to extend measures to support the economy further in 2022. With the better outlook for the top-metal consuming country, copper, a barometer of the global economy's health, is edging higher. Today, copper is still on the advance on the release of Chinese trade data - imports and exports rose much more than expected in November, as external demand was buoyant ahead of the holidays, while domestic production rebounded after the energy crunch eased.Surprisingly, Chinese coal imports were up 11% m-o-m in November at 35 mln tonnes, up 67% y-o-y. Global prices - much higher than domestic prices - did not scare off the Chinese buyers, who are busy preparing for the winter period. With production at the targeted 12 mtpd since mid-November and imports at record highs, the overall coal supply should meet Chinese demand in December, according to our calculations. This will probably drive coal quotes lower. Extreme weather remains the key risk to such an outlook (assuming the current the natural gas market situation prevails), and we have already seen wetter weather in Australia and Indonesia.Sentiment toward the Chinese real estate segment significantly improved after Chinese authorities' stimulus rhetoric hit the markets and the reserve requirement ratio was cut yesterday. This, combined with the strong import data for November (iron ore imports were higher 14% m-o-m, though they remained down 3% y-o-y), has pushed iron ore prices back up to circa $110/tonne. We believe the rally is limited, however, due to the Chinese government measures that will slow steel output in 1H22 ahead of the Winter