Commodities Daily - February 14, 2022

> Oil surged following IEA report, US statements over Ukraine situation. This morning, Brent peaked at $96.16/bbl as a flurry of diplomacy over the weekend, including a telephone call between presidents Joe Biden and Vladimir Putin, produced no breakthroughs on the Ukraine issue. We think today's release of the monthly EIA drilling productivity report, which will contain the US shale production forecast for March, is likely to provide headwinds to the current oil price rally. We see Brent likely continuing to consolidate within the $95-96/bbl range.> Gold rallied after US statement over Ukraine situation. Gold rocketed from $1,825/oz to $1,860/oz on Friday, while the 10y US Treasury yield fell from 2.02% to 1.95%. Gold is trading near $1,855/oz as we write, and we expect it to trade in a $1,840-1,860/oz corridor today. There are no significant macro releases today.> Base metals plunge amid growing concerns of more hawkish Fed; iron ore under pressure from Chinese regulation. Base metals plunged on Friday as investors took profit amid concerns about a hawkish Fed in the wake of Thursday's higher than expected US CPI. This week, the focus remains on Fed rhetoric, while Chinese data will also drive the market. Iron ore is falling on Chinese government interventions in the market aimed at cracking down on "speculation."OIL SURGED FOLLOWING IEA REPORT, US STATEMENTS OVER UKRAINE SITUATIONOn Friday, after sliding to as low as $90.5/bbl, Brent began to generate positive momentum following a bullish IEA report. The agency warned that global oil prices could climb further because of OPEC+'s "chronic" struggle to revive production -- unless the Middle Eastern heavyweights pump extra to compensate. Despite the IEA's warnings, its forecasts still indicate that world oil markets will tip back into surplus for the rest of this year, as supplies outside of OPEC pick up. The agency strongly revised higher its forecast for US oil supply growth in 2022 and also upgraded its forecast for Russian production higher m-o-m, while simultaneously noting the country is approaching capacity limits. The IEA also revised up its global demand estimates by 0.97 mln bpd and 0.87 mln bpd m-o-m for 2021 and 2022, respectively, mostly due to changes to historical data. The upward demand revision results in a reduction of the 1Q22 stock build estimate from 1.5 mln bpd last month to 0.25 mln bpd this month. Along with the recognition that OPEC+ countries are underperforming, the IEA's implied 2022 balance has significantly tightened from the strong oversupply story it was telling just two months ago.Later in the day, Brent spiked toward $95.7/bbl after US National Security Advisor Jake Sullivan said that the US believes Russia could take offensive military action or attempt to spark a conflict inside Ukraine as early as this week. Investors fear that this could disrupt crude supplies. Front-month Brent eventually settled at $94.44/bbl, fixing $3.03/bbl above the previous settlement. This morning, it peaked at $96.16/bbl as a flurry of diplomacy over the weekend, including a telephone call between presidents Joe Biden and Vladimir Putin, produced no breakthroughs. In our view, today's release of the monthly EIA drilling productivity report, which will contain the US shale production forecast for March, is likely to provide headwinds to the current oil price rally. We think Brent will likely continue consolidating within the $95-96/bbl range.As for the rest of this week, US shale majors will report their 4Q21 earnings. Continental Resources will kick off earnings today, followed by Devon tomorrow and industry giant Pioneer Natural Resources on Wednesday. US shale is in better financial shape after pandemic-induced demand losses forced producers to cut spending and curb drilling. Now, with oil well above $90/bbl for both Brent and WTI and many exploration and production companies poised to report record free cash flows, the big question is whether they'll stay financially disciplined or decide to make hefty investments in order to ramp up production. Ahead of this week's earnings, there were further signs that activity is picking up across the shale patch. The number of rigs drilling for oil in US basins jumped by 19 to 516, according to Baker Hughes data on Friday. That was the biggest gain since LD RALLIED AFTER US STATEMENT OVER UKRAINE SITUATIONGold rocketed from $1,825/oz to $1,860/oz on Friday, its highest level since mid-November, while the 10y US Treasury yield fell from 2.02% to 1.95%. Meanwhile, EUR/USD slid from 1.143 to 1.134. A new bout of geopolitical tensions led to risk-off sentiment in the US market, with the S&P 500 falling almost 2%. The role of gold as a safe haven has increased, while the US 10y yield has moved below the key level of 2% on higher demand. US National Security Adviser Jake Sullivan said the US government believes that a conflict in Ukraine may begin as soon as this week. This buoyed gold, which within minutes rose more than $20/oz. It also provided significant support for palladium, which climbed from $2,260/oz to $2,360/oz (Russia produces almost 40% of worldwide supply, which could be affected by geopolitical tensions. Meanwhile, the University of Michigan consumer sentiment index for February printed only 61.7, below the consensus of 67, probably due to the increasing inflation risks. Moreover, Richmond Fed President Thomas Barkin stated that we was not so confident in a 50 bp hike in March, saying that any hike should be data-dependent. That also provided tailwinds for bullion, which was under pressure after St. Louis Fed President James Bullard had called for more aggressive rate hikes a day earlier.During Asian trading today, gold is near the $1,855/oz level. There are no significant macro releases today. On tap for this week are the minutes from the most recent FOMC meeting, January US PPI and industrial production and US housing markets statistics for last month. Also, several Fed officials are due to speak this week, which may provide new outlooks for the rate liftoff. There is a chance that gold may slide lower today after the panic-driven surge on Friday. The Fed's announcement of an unplanned closed board meeting today may add some pressure on bullion. However, as geopolitical tensions remain elevated, we do not expect gold to return quickly to previous levels and expect it to trade in a $1,840-1,860/oz corridor SE METALS PLUNGE AMID GROWING CONCERNS OF MORE HAWKISH FED; IRON ORE UNDER PRESSURE FROM CHINESE REGULATIONBase metals traded lower on Friday. The 3m LME contract for copper plunged 3.84% (-$344/tonne from the previous day's close) to $9,861/tonne, aluminum slid 3.51% (-$144/tonne) to $3,137/tonne, nickel dropped 2.02% (-$831/tonne) to settle at $23,051/tonne and zinc was lower 2.07% (-$115/tonne) at $3,627/tonne.Base metals closed in the red as profit taking emerged and the dollar index surged. Investors continued to weigh the higher than expected US CPI print released on Thursday, with the consensus now heading toward a sevenfold Fed rate hike this year. News that the Fed convened a special, unscheduled meeting today also spurred fears of much faster tightening. Apart from the meeting, we are watching China this week as the PBoC will make a rate decision (another cut would be supportive for metals). Chinese CPI and PPI data is also due on Wednesday, which we expect to bring some volatility to the markets.Chinese lending and inflation data will also drive the iron ore market this week, with more easing likely positive for the ferrous metal used in steelmaking. Meanwhile, the Dalian Commodity Exchange raised transaction fees for some iron ore futures on Friday, warning that it would "punish all kinds of violation of laws" to ensure smooth trading. We are expecting some more interventions aimed at cracking down on "speculation" from the Chinese authorities this week, which is likely to pressure iron ore