Commodities Daily - February 17, 2021

> Oil keeps trading near recent highs as US freeze-offs remove more crude supply. This morning, Brent is trading near yesterday's highs as a deepening energy crisis in the US has now halted more than 3.5 mln bpd of crude production, while similar volumes of oil refining capacity are now offline. Today, investors are eying US January retail sales and PPI data, while the weekly API update on US inventories is due overnight. The fact that for the last few days Brent has been unable to break above $63.9/bbl resistance makes it vulnerable to a correction toward the $61.7-62.2/bbl range, although we do not think that this is the most likely outcome today. Today, we think it will continue pushing to break through that resistance level.> Gold drops as inflation trade drives US Treasury yields higher; FOMC minutes eyed. Today will see the release of the January FOMC minutes, which will reveal in more detail the Fed's plans to potentially resume an ultra-soft monetary policy. We will also see the release of US retail sales for January, PPI, industrial production and mortgage applications. We believe gold is poised for further losses as its 50d MA has retreated below its 200d counterpart, a so-called death-cross pattern. The next support level for gold stands at $1,783/oz, which we think will be tested today. OIL KEEPS TRADING NEAR RECENT HIGHS AS US FREEZE-OFFS REMOVE MORE CRUDE SUPPLYAfter hovering above $63.5/bbl at the start of the day yesterday, front-month Brent slid to $63/bbl midday, although during the US trading hours it rebounded back to $63.5/bbl. Along the way it settled at $63.35/bbl, fixing $0.05/bbl above the previous settlement. The energy crisis in the US continues to dominate the headlines, with freezing temperatures now halting at least 3.5 mln bpd of crude oil output, Bloomberg reports citing traders and industry executives. Energy Aspects, meanwhile, calculates that the disruptions could end up resulting in a 0.7 mln bpd output loss in February, a tally that could grow if it emerges that significant damage to infrastructure has been sustained. Temperatures in the Permian shale oil basin (which produces around 4.3 mln bpd of oil) are expected to rise above freezing only this weekend, meaning that production will likely only return to its prior level around February 22. Yesterday's EIA drilling productivity report showed that the agency now expects US tight oil output to drop 0.077 mln bpd m-o-m to 7.504 mln bpd in March. It sees overall US output falling for the fifth straight month. This comes despite the gradual rise in the active oil rig count since October amid the recovery in prices. The decline is partially attributable to pressure from investors to reduce debt, which has kept companies from rushing to complete new wells.We note that given the uncertainty of timelines around the restoration of normal operations in the Permian Basin, estimates of the current production freeze-offs could further increase. As producers need pipes to be fully running and power prices to normalize before they bring production back, a substantial return in output may not occur until this weekend at the earliest. However, lost refinery oil demand should still outstrip lost upstream production. Calculations provided by Reuters show that the cold spell has now knocked out roughly 4 mln bpd of refining capacity, or more than one-fifth of national capacity. This will result in smaller US refined product exports and will help to erode the overhang in Atlantic Basin products, which will support refined product crack spreads similar to what we saw during Hurricane Harvey (the current outage peak is double the peak during Harvey), even though the duration of this outage is expected to be far less. US gasoline stocks are likely to fall by 20 mln bbl by March, setting up for a very strong US spring and summer gasoline season, which is supportive for refining margins. The rebalancing of the refined product market will now be accomplished swiftly, as inventories will be run down due to this artificial supply event even before global demand really revives amid the increasing deployment of vaccines.This morning, Brent briefly slid to $62.7/bbl amid the stronger dollar, global stock markets edging back from record highs and as Norway, western Europe's largest oil and gas producer, averted a strike and shutdown of major offshore fields. As we write, Brent has returned back to $63.5/bbl, with investors eying US January retail sales and PPI data, while the weekly API update on US inventories is due overnight. The fact that for the last few days Brent has been unable to break above $63.9/bbl resistance makes it vulnerable to a correction toward the $61.7-62.2/bbl range, although we do not think that this is the most likely outcome today. Today, we think it will continue pushing to break through that resistance level.GOLD DROPS AS INFLATION TRADE DRIVES US TREASURY YIELDS HIGHER; FOMC MINUTES EYEDGold was stuck at $1,820-1,825/oz yesterday morning but slid to $1,790/oz in early US trading. That session proved to be rather volatile, as bullion briefly managed to spike to $1,815/oz, only to retreat back to $1,790/oz later on. The two main factors weighing on bullion were an about-turn in EUR/USD (which peaked at 1.217 and then sank just below 1.210) and an extreme rise in the 10y US Treasury yield, which almost reached a one-year high of 1.3%. The 10y real yield, which strips out inflation and is seen as a pure read for the economy's growth prospects, climbed to minus 0.93% from minus 1%, the highest in about a month. Driving US Treasury yields higher are expectations of vast liquidity injections into the US economy in the coming weeks via Joe Biden's $1.9 trln fiscal package and direct payments, as well as rising energy prices, which are generating fears of excessive inflation and causing investors to price in a more hawkish long-term monetary policy. New Covid cases in the US are down for a fifth consecutive week amid a rising vaccination rate (around 16% of Americans have now received a jab, supporting calls for social restrictions to be eased). This is giving investors confidence that the US economy will stage a solid recovery this year. The EU vaccination rate is much more modest, at just 5% of the population.Gold remains under pressure as we write and is still battling with the $1,790/oz support level. Today will see the release of the January FOMC minutes, which will reveal in more detail the Fed's plans to potentially resume an ultra-soft monetary policy. These plans are likely to remain unchanged over the near term, which should curb the rise in US Treasury yields and help bullion to climb back up. We will also see the release of US retail sales for January, PPI, industrial production and mortgage applications. We believe gold is poised for further losses, as its 50d MA has retreated below its 200d counterpart, a so-called death-cross pattern. The next support level for gold stands at $1,783/oz, which we think will be tested today. Resistance is at $1,801/oz, which we think is very unlikely to be tested today, although a break above would take gold to $1,818/oz.