Commodities Daily - February 16, 2022

> Oil slides as Ukraine tensions ease, US weekly inventory data in focus. This morning, Brent remains supported near $93/bbl as API overnight reported small weekly inventory draws for crude oil, gasoline and distillates. Today, apart from the weekly EIA inventory update, investors will eye US January retail sales and industrial production data. We think Brent will likely slide to $92/bbl as the EIA's crude oil inventory data could end up less bullish than what was reported by the API overnight.> Gold moves lower as geopolitical risks ease. Gold fell from $1,870/oz to $1,855/oz yesterday, while the 10y US Treasury yield rose from 1.98% to 2.03%. Gold is trading near $1,855/oz as we write. Markets await the publication of the latest FOMC minutes and January retail sales data from the US. We expect bullion to test support at $1,850/oz today, with a break below leading to trading in the $1,830-1,850/oz corridor.> Base metals move little in absence of major drivers; US and China data in focus. Base metals traded mixed yesterday, with the dynamics relatively moderate in the absence of major drivers. Somewhat of an easing in the Russia-Ukraine tensions spurred some risk-on sentiment, which is positive for base metals, though aluminum dropped slightly as the news could mean a lower possibility of a supply disruption. Today, investors are assessing Chinese inflation data, with what turned out to be lower readings supporting metals.OIL SLIDES AS UKRAINE TENSIONS EASE, US WEEKLY INVENTORY DATA IN FOCUSYesterday, Brent tumbled as much as $4.2/bbl toward $92/bbl before eventually stabilizing around $93/bbl as market concerns around Ukrainian tensions eased after Russia's Defense Ministry stated that some troops are starting to return to their regular bases after completing drills. However, NATO Secretary General Jens Stoltenberg said that there were not yet signs of a reduced Russian presence along the border with Ukraine. Also, following Moscow's announcement, President Joe Biden said the US had not verified the claim and cautioned a Russian attack remains possible. Meanwhile, Russian President Vladimir Putin and German Chancellor Olaf Scholz held what were described as constructive talks that could be the basis of further discussions. Front-month Brent eventually settled at $93.28/bbl, fixing $3.2/bbl below the previous settlement.This morning, Brent remains supported near $93/bbl as the API overnight reported weekly inventory draws for crude oil (-1.07 mln bbl), gasoline (-0.92 mln bbl) and distillates (-0.55 mln bbl). Today, oil investors will primarily focus on the weekly EIA inventory update. We expect a small crude oil stock build, as refinery closures more than offset the effect of the freeze-offs on crude oil production. We also expect draws for both gasoline and distillates. Apart from the EIA inventory data investors will eye US January retail sales and industrial production data. Regarding retail sales, a surge in auto sales is likely to outweigh any Omicron-related weakness elsewhere. The drop in restaurant sales was likely much shallower than during previous Covid outbreaks. All in all, with disposable personal income back to its pre-recession trend (as most pandemic-era stimulus payments have ended), the level of retail sales will likely normalize to lower and more sustainable levels this year. Later today, we expect Brent to slide toward yesterday's low of $92/bbl as the EIA's crude oil inventory data could end up less bullish than what was reported by the API LD MOVES LOWER AS GEOPOLITICAL RISKS EASEGold fell from $1,870/oz to $1,855/oz yesterday, while the 10y US Treasury yield rose from 1.98% to 2.03%. Meanwhile, EUR/USD edged up from 1.130 to 1.136. After Russian President Vladimir Putin announced a partial pullback of troops from the Ukrainian border and called for a continued search for diplomatic solutions, bullion retreated and the 10y Treasury yield climbed above 2%. The main macro release yesterday was January PPI from the US, which beat expectations at 1.0% m-o-m (consensus 0.5%) and 9.7% y-o-y. The data indicated that the upward pressure on prices remains elevated and also showed that producer inflation is spreading into new categories, much as we have been seeing in the consumer price data. The PPI report showed a significant increase in prices for hospital outpatient care (which was one of the main contributors to the above-consensus reading), vehicles, jewelry and footwear. This all created headwinds for bullion, as the data was seen as calling for more aggressive policy tightening by the Fed - perhaps a 50 bp rate hike in March. Meanwhile, the February reading of the Empire State manufacturing index came in at only a quarter of the consensus estimate, which was slightly positive for gold.During the Asian trading session today, gold has been quoted near $1,855/oz. Markets await the publication of the latest FOMC minutes and January retail sales data from the US. Also due today are January US industrial production, the NAHB US housing market index reading for January and December eurozone industrial production. As the safe-haven appeal of bullion has diminished somewhat amid the ease in geopolitical tensions, fundamental factors may return to the fore, meaning today's macro releases could be consequential. As for the US retail sales data, analysts expect 2% m-o-m growth in January following the decline late last year. The January industrial production data, meanwhile, is expected to show a more moderate recovery following the modest decline in December. Better than expected data from the US could be seen as building the case of the Fed hawks, which would weigh on gold prices. We expect bullion to test support at $1,850/oz today, with a break below leading to trading in the $1,830-1,850/oz SE METALS MOVE LITTLE IN ABSENCE OF MAJOR DRIVERS; US AND CHINA DATA IN FOCUSBase metals traded mostly higher yesterday, with aluminum an exception. The 3m LME contract for copper added 0.49% (+$49/tonne from the previous day's close) to $9,969/tonne, aluminum dropped 0.20% (-$7/tonne) to $3,208/tonne, nickel added 0.53% (+$122/tonne) to settle at $23,292/tonne and zinc was up 0.21% (+$7/tonne) at $3,582/tonne.Base metals showed moderate dynamics yesterday in the absence of major drivers, while aluminum hovered around its highest level since 2008 as investors weighed a seeming pullback in the heightened geopolitical tensions over Ukraine. The news spurred a risk-on mood, generating some momentum in base metals prices while at the same time easing concerns about a potential supply disruption of aluminum from Russia in the event of a military escalation or sanctions, which put a lid on the lightweight metal's quotes. However, the drop was moderate, which means investors are not convinced the story is over. We believe aluminum will remain at elevated levels or even reach new highs until the confrontation over Ukraine comes to an end or at least some transitional consensus is reached.Among important data releases, yesterday the US January PPI print showed higher than expected inflation, at 9.7% y-o-y. This has bolstered expectations that the Fed will turn to a more aggressively hawkish stance. Meanwhile, the PBoC kept its 1y interest rate unchanged at 2.85%, while Chinese inflation was reported lower in January, with the PPI up 9.1% y-o-y versus 10.3% in December and the CPI up 0.9% y-o-y versus 1.5% - both readings below expectations. The lower inflation gives the central bank the scope to cut interest rates further and inject liquidity into the economy, in our view. We believe the PBoC will cut rates in 2Q22, which would be supportive for metals. As we write, iron ore futures in Singapore are already reacting positively to the lower inflation readings, having added 3%