Commodities Daily - December 8, 2021

> Ahead of weekly EIA inventory report, oil prices stabilize following rally. This morning, Brent continues to hover above $75/bbl. The API overnight reported a crude oil inventory draw (-3.1 mln bbl) with an increase in oil inventories at Cushing (+2.4 mln bbl) and builds in gasoline (+3.7 mln bbl) and distillates (+1.2 mln bbl). Today, investors will primarily eye the weekly EIA crude oil and refined products inventory update, which is expected to be on the bearish side in line with the API report. Brent, in our view, is likely to stabilize around $75/bbl.> Gold prices edge up on upbeat European economic data. Gold edged up from $1,780/oz to $1,785/oz yesterday, while the US 10y Treasury yield rose from 1.45% to 1.47%. Gold is trading near $1,790/oz as we write. Today, the market awaits the October JOLTS report from the US. We expect bullion to trade in a $1,775-1,795/oz corridor.> Base metals climb higher on the back of strong Chinese trade data; zinc on the rise with bright 1Q22 outlook. Base metals found support yesterday from stronger than expected Chinese import data, which probably owed to seasonal restocking in addition to buoyant demand. Zinc is currently on the rise, and we see further upside for the metal emerging in 1Q22.AHEAD OF WEEKLY EIA INVENTORY REPORT, OIL PRICES STABILIZE FOLLOWING RALLYYesterday, front-month Brent rallied $3.00/bbl toward $76.30/bbl before stabilizing near $75.00/bbl as the advance mirrored a similar relief rally in equities, with the S&P 500 jumping 2.2% to the highest level since late November. The backdrop was that the initial data on the Omicron variant shows the surge in cases has not overwhelmed hospitals, and there's little evidence of a significant hit to global oil consumption. Brent eventually settled at $75.44/bbl, fixing $2.36/bbl above the previous settlement. We highlight that, according to a study by the African Health Research Institute, researchers found that the Pfizer vaccine might be less effective at protecting against Omicron, that booster shots would likely reduce the chances of infection and that the loss of immune protection for the Pfizer vaccine is "robust, but not complete."Yesterday, investors were also digesting a mixed monthly EIA report. The agency lowered its estimate of global oil inventory stock draws by 0.3 mln bpd to 1.3 mln bpd in 2021. For 2022, it now forecasts that stocks will rise by 0.5 mln bpd (a 0.3 mln bpd upward revision versus last month) as it expects that increases in production will outpace slowing growth in global demand, particularly in light of renewed concerns about the pandemic. It also revised downward its global demand forecast for both 2021 and 2022 (by 0.62 mln bpd and 0.43 mln bpd, respectively), citing recently announced travel restrictions following outbreaks related to the Omicron variant. The agency's biggest downward demand revisions were in the FSU and Asia-Pacific for 2021 and in Latin America and the FSU for 2022. In our view, the scale of the demand downgrades does not correspond with the light travel restrictions announced so far due to Omicron. The EIA also revised its 2021 and 2022 non-OPEC production forecasts lower (by 0.29 mln bpd and 0.49 mln bpd, respectively), led by Asia-Pacific and Europe. It cut its projections for the global benchmark Brent and WTI by nearly $2/bbl for 2022 and now expects Brent to average $70.05/bbl next year and WTI $66.42/bbl. This morning, Brent continues to hover above $75/bbl. The API overnight reported a crude oil inventory draw (-3.1 mln bbl) with an increase in oil inventories at Cushing (+2.4 mln bbl) and builds in gasoline (+3.7 mln bbl) and distillates (+1.2 mln bbl). Today, investors will primarily eye the weekly EIA crude oil and refined products inventory update, which is expected to be on the bearish side in line with the API report. Brent, in our view, is likely to stabilize around $75/ LD PRICES EDGE UP ON UPBEAT EUROPEAN ECONOMIC DATAGold edged up from $1,780/oz to $1,785/oz yesterday, while the US 10y Treasury yield rose from 1.45% to 1.47%. Meanwhile, EUR/USD remained steady near 1.128. Bullion found support yesterday from signs of further economic recovery in the eurozone. Somewhat surprisingly, the last reading of 3Q21 GDP growth in the eurozone came in at 3.9% y-o-y, above the consensus of 3.7%. The ZEW economic sentiment index for the eurozone also picked up, climbing to 26.8 from 25.9 in November. These data points indicated that the economic conditions in Europe are improving, which fueled some concern that the ECB may soon join the Fed and start to roll back its pandemic-era stimulus amid the rising inflationary pressure and the strong economic recovery. That provided support for the euro and hence gold, which managed to climb higher even though the 10y Treasury yield was also rising. Meanwhile, Pfizer announced yesterday that a field study it conducted suggested that its vaccine booster shot provides partial protection against the Omicron strain. This further dispelled the fears surrounding the variant, which had been providing solid support for gold before scientists and politicians began to signal that the new strain does not seem to be causing severe symptoms. During the Asian trading session today, gold rose to $1,790/oz. Markets await the October JOLTS report from the US. The release is expected to show job openings holding steady at 10.476 mln in October, which would be another sign that the economic recovery remains on track in the US. Meanwhile, bullion is still facing pressure from growing anticipation over the FOMC meeting on December 14-15, where the Fed is likely to announce that it will accelerate QE tapering, which would boost Treasury yields, thus weighing on gold. All in all, we expect bullion to trade in a $1,775-1,795/oz corridor SE METALS CLIMB HIGHER ON THE BACK OF STRONG CHINESE TRADE DATA; ZINC ON THE RISE WITH BRIGHT 1Q22 OUTLOOKBase metals closed higher yesterday. Three-month LME contracts on copper rose 0.95% (+$90/tonne from the previous day's close) to $9,595/tonne, while aluminum climbed 1.56% (+$41/tonne) to $2,629/tonne, nickel 1.86% (+$369/tonne) to $20,189/tonne and zinc 2.02% (+$64/tonne) to $3,227/tonne.Metals found support from stronger than expected trade data from China yesterday. Total imports were up 32% y-o-y in November versus the expected 20%, suggesting demand remains somewhat buoyant in the world's top metal-consuming economy. Although there have been signs of improvement from the still-slowing economy, we think the increase in imports across all commodities probably had much to do with restocking for the winter.Meanwhile, zinc continued in its uptrend yesterday as investors assessed the impact of the supply disruption caused by the power crunch in Europe and China. The supply losses at smelters have already had an impact on the market balance. Additional support for prices is now coming from an ongoing rebound in demand for zinc at galvanizing plants as steelmakers attempt to meet their targets for the year. Although the seasonal uptick in steel output following Chinese producers' overreaction to the output cuts in September and October has boosted demand for zinc (steel galvanizing accounts for around 50% of total zinc consumption), this support will likely prove short-lived, as we are entering a period of serious steel output cuts in China starting on January 1. However, we believe the effect of lower demand will be offset by production cuts at smelters in China amid electricity consumption restrictions and the closure of European smelters due to high power costs. Hence, energy-intensive metals, such as zinc, are likely to see tailwinds in