Commodities Daily - February 11, 2022

> Oil had a choppy session yesterday amid soaring US inflation; IEA monthly report in focus today. This morning, Brent is trading near $91/bbl. Investors are looking ahead to the monthly IEA oil market report and the preliminary University of Michigan consumer sentiment index reading for February. In our view, the IEA is likely to stick to its view that inventories will build up this year on average. Meanwhile, risk sentiment in global markets is likely to continue deteriorating amid growing expectations of a more aggressive Fed rate hike cycle, which were fueled by the surge in US inflation reported yesterday. We think Brent is likely to end the week close to $90/bbl as a result.> Gold down after high US CPI. Gold slid from $1,830/oz to $1,825/oz yesterday, while the 10y US Treasury yield rose from 1.94% to 2.02%. Gold is trading near $1,825/oz as we write. The market awaits University of Michigan consumer sentiment index for February. We expect bullion to test support at $1,820/oz today.> Base metal prices move higher, then slip back after US CPI data; iron ore on the rise. Base metals continued to rally early yesterday before a higher than expected US CPI print sparked a reversal. We think we might see some profit taking today, as investors are beginning to expect the Fed to respond more aggressively to the rise in inflation. Iron ore is back on the rise amid both supply- and demand-side issues, though we tend to think the latter have been overestimated. OIL HAD A CHOPPY SESSION YESTERDAY AMID SOARING US INFLATION; IEA MONTHLY REPORT IN FOCUS TODAYYesterday, Brent slid $1.5/bbl to $91/bbl after the US CPI printed at the highest level in four decades. It then rallied to as high as $93.1/bbl, but only to ease back to $91/bbl later in the day, as the high inflation reading stoked bets that the Fed will raise interest rates by a full percentage point over the next three meetings (St Louis Fed President James Bullard indicated he was in favor of this trajectory for rates yesterday) and by 175 basis points by the end of the year. Oil prices closely mirrored moves in the S&P 500 and EUR/USD yesterday. The latest turbulence in markets signals that investors have yet to adjust to the quicker than expected withdrawal of the Fed's pandemic-era stimulus. US inflation climbed to 7.5% y-o-y in January, which was the fastest pace since 1982 and higher than the 7.3% economists expected. Goods prices continued to soar, while the costs of services also started to pick up.The higher than expected US inflation data for January overshadowed yesterday's OPEC monthly report. In the report, the OPEC Secretariat highlighted that the recovery in global oil demand could surpass its forecasts for this year, as the rebound in economic activity and travel from the pandemic has been gathering pace. We note, however, that the agency's 2022 demand forecast remained unchanged. OPEC expects the main contributors to global oil demand to be gasoline and diesel, which account for around half of the global oil demand growth that it forecasts. Its estimate for 2022 non-OPEC supply was revised down by a small 0.05 mln bpd m-o-m, led by Latin America. Front-month Brent eventually settled at $91.41/bbl, fixing $0.4/bbl below the previous settlement.This morning, Brent is trading near $91/bbl. Investors are looking ahead to the monthly IEA oil market report and the preliminary University of Michigan consumer sentiment index reading for February. In our view, the IEA is likely to stick to its view that inventories will build up this year on average. Meanwhile, risk sentiment in global markets is likely to continue deteriorating amid growing expectations of a more aggressive Fed rate hike cycle, which were fueled by the surge in US inflation reported yesterday. We think Brent is likely to end the week close to $90/bbl as a result. We note that last month the IEA envisioned a 1.8 mln bpd buildup in liquids stockpiles in 2022, which seems rather pessimistic to us, as the estimate is based on the assumptions that all of the OPEC+ producers will raise output in line with the quota increases until they run out of spare capacity and that output from Libya, Venezuela and Iran will remain at the levels of the latest actual LD DOWN AFTER HIGH US CPIGold slid from $1,830/oz to $1,825/oz yesterday, while the 10y US Treasury yield rose from 1.94% to 2.02%. Meanwhile, EUR/USD was virtually flat near 1.143. The January US CPI print initially supported gold, but when the Fed subsequently signaled a more hawkish view, gold began to retreat. The US price increase was higher than expected at 0.6% m-o-m (consensus 0.4%) and 7.5% y-o-y (consensus 7.2%), the highest reading in 40 years. Also, inflation is spreading across a wider spectrum. Rents are soaring, as are prices of electricity, household furnishing and health insurance. Moreover, the core CPI reading, which excludes volatile energy and food, also rose above the consensus. Gold found support from the data at the time of publication and tried to consolidate above $1,840/oz, despite weekly initial jobless claims having come in better than expected. Worries that the Fed may be behind the curve on inflation were the main driver for gold. However, comments by St Louis Fed President James Bullard solidified expectations of more aggressive tightening to fight inflation. He said that he would like to see a 100 bp rate increase by July and also voiced his support for a 50 bp hike at the March meeting. That hawkish tone from Bullard pushed markets to almost fully price in a 50 bp rate hike in March, which pressured bullion to $1,825/oz - an optimistic level for gold given that the 10y yield climbed above 2%.During Asian trading today, gold is near $1,825/oz. The market awaits the University of Michigan consumer sentiment index for February. The Fed's display of willingness to confront inflation will likely pressure bullion during the day. The University of Michigan print may offer slight support, but we don't expect it to be enough to prevent prices from decreasing. Richmond Fed President Tom Barkin is expected to give a speech today during which he may signal that the Fed is ready for a 50 bp rate liftoff in March and could offer other hawkish signs. We expect bullion to test support at $1,820/oz SE METAL PRICES MOVE HIGHER, THEN SLIP BACK AFTER US CPI DATA; IRON ORE ON THE RISEBase metals continued to trade higher yesterday. The 3m LME contract for copper rose 1.45% (+$146/tonne from the previous day's close) to $10,205/tonne, aluminum edged up 0.46% (+$15/tonne) to $3,281/tonne, nickel surged 3.00% (+$695/tonne) to $23,882/tonne and zinc rallied 2.68% (+$97/tonne) to $3,742/tonne.The broad rally in base metals continued yesterday, with aluminum nearly touching its all-time high of $3,380/tonne registered in 2008. Aluminum futures reached $3,333/tonne in the afternoon before easing back to $3,280/tonne by the close, which meant only a limited d-o-d gain. The other base metals also slid near the end of the trading day after climbing toward resistance levels earlier on (both copper and zinc moved closer to their recent highs from October 2021). The weakness yesterday evening came after the US CPI printed at 7.5% y-o-y in January, above the December print of 7.0%. The negative market reaction to the inflation data indicated that investors became increasingly worried about the Fed's upcoming tightening cycle. It now seems likely that the Fed will shift to an even more hawkish stance in order to tame inflation. This would cause the dollar to strengthen, which would weigh on dollar-denominated assets, including metals. We think this could be cause for some profit taking in base metals today.Iron ore futures in Singapore are touching new local highs amid issues on both the supply and demand sides. On the supply side, Brazilian exports are under pressure after Vale SA reported a drop in output due to wet weather conditions, which we note are actually normal for this time of the year. On the demand side, investors are absorbing signals from Beijing about China's ambitious infrastructure plans for this year and its decision to push forward the peak for emissions from 2025 to 2030. As for emissions, the key pillars at the heart of the updated plan to make the steelmaking industry as carbon-neutral as possible remain the same. The vast majority of metallurgical sites (80%) still need to reach ultra-low emissions levels by 2025, while the share of electric arc furnaces is set to climb above 15% by 2025 (in the 2020 plan, there was a range of 10-20%). Our reading of the changes is that Chinese authorities want to play it safe after 2021, when it became apparent that the country is not yet prepared to give up on fossil fuels. That said, we consider the recent rise in iron ore prices to be an overreaction to the news, which seemed positive at first glance. We anticipate a third round of interventions in China, which we think may involve action rather than verbal warnings.