Commodities Daily - February 18, 2022

> Oil prices ease alongside with geopolitical tensions. This morning, Brent is under pressure and is hovering just above $92/bbl as planned talks between Russia and the US over Ukraine have alleviated some investor concern about geopolitical risks. Today, investors will primarily eye US active rig count data from Baker Hughes after a very strong 19-unit gain last week. We think Brent will most likely end the day within a lower $91-92/bbl range.> Bullion touches new local high amid rising geopolitical risks. Gold firmed from $1,870/oz to $1,900/oz yesterday, while the 10y US Treasury yield fell from 2.03% to 1.96%. Gold is trading near $1,890/oz as we write. Today will see the publication of the preliminary reading of the eurozone consumer confidence index for February and US existing home sales for January. We expect bullion to test support at $1,880/oz today.> Base metals benefiting from geopolitical tensions; iron ore having a tough week. Base metals mostly traded higher yesterday with the focus still on geopolitics. Aluminum is likely to remain an outperformer, leading the pack higher amid fears of a potential disruption in supply from Russia. Meanwhile, it has been a painful week for iron ore, which could soon face additional pressure from further interventions by the Chinese authorities, who have been trying to crack down on speculation.OIL PRICES EASE ALONGSIDE WITH GEOPOLITICAL TENSIONSAfter rallying to as high as $94.5/bbl yesterday, later in the day Brent began to ease to the $92-93/bbl range, weighed down by the possibility that Iran's nuclear deal may be revived and a US stock market slump. Traders sought safety in bonds, gold and other safe-haven assets, as heightened concern over geopolitical risks added to worries about the outlook for much tighter Fed policy. St Louis Fed President James Bullard said bringing down inflation may require overshooting the target neutral interest rate, which he sees as about 2%. He repeated his view that the Fed should hike by 100 bps by July 1 and start a balance-sheet runoff in 2Q22. Front-month Brent eventually settled at $92.97/bbl, fixing $1.84/bbl below the previous settlement.This morning, Brent is under pressure and is hovering just above $92/bbl as planned talks between Russia and the US over Ukraine alleviated some investor concern about geopolitical risks. Russian Foreign Minister Sergei Lavrov agreed to meet US Secretary of State Antony Blinken for talks in Europe next week, the State Department said Thursday night. Today, investors will primarily eye the US active rig count data from Baker Hughes after a very strong 19-unit gain last week. We think Brent will likely end the day within a lower $91-92/bbl range as investors will eye US-Russia talks next week. As for US crude oil production growth, it remains to be seen whether or not the surge in drilling will continue long enough to meaningfully increase output.This week, the market was monitoring 4Q21 shale-patch earnings reports and commentary to get a sense of whether drillers were revisiting production plans. With WTI prices sitting above $90/bbl, US producers are tempted to increase output, and recent indicators do signal that drilling is heating up. That said, drillers such as Pioneer Natural Resources (the biggest explorer of the 5.1 mln bpd crude oil producing Permian Basin) are re-committing to plans for limited production growth even if crude prices march beyond $100/bbl. Pioneer Natural Resources CEO Scott Sheffield highlighted that US shale is constrained by labor shortages and demands by shareholders to return cash and also noted that the costs of producing shale oil increased 10% to 15% in the latter half of last year and are set to increase another 6% this LLION TOUCHES NEW LOCAL HIGH AMID RISING GEOPOLITICAL RISKSGold jumped from $1,870/oz to an eight-month high of $1,900/oz yesterday, while the 10y US Treasury yield retreated from 2.03% to 1.96%. EUR/USD edged down from 1.138 to 1.136. A fresh round of geopolitical uncertainty boosted gold, as did generally negative US economic data. Yesterday's news flow proved worrying for investors, highlighting the risks of escalation and augmenting the safe-haven appeal of gold and US Treasuries. The S&P 500 index lost about 2%. Meanwhile, the Philadelphia Fed business outlook for February was significantly below expectations and, together with worse than expected US weekly jobless claims, generated further support for gold. Yesterday's US housing market data for January was more mixed but failed to deter gold's advance. Bullion also shrugged off further hawkish comments from Fed officials. St Louis Fed President James Bullard suggested the Fed should lift rates above 2% to curb inflation. Cleveland Fed President Loretta Mester said the rate hikes should begin in March and the Fed should reduce its balance sheet more quickly.Gold is trading near $1,890/oz as we write. Today will see the publication of the preliminary reading of the eurozone consumer confidence index for February and US existing home sales for January. Headlines that Russian Foreign Minister Sergei Lavrov and US Secretary of State Antony Blinken are planning talks next week have slightly reduced the geopolitical tension. This could prove to be a signal for gold to correct slightly today following its recent run higher. We therefore expect bullion to test support at $1,880/oz SE METALS BENEFITING FROM GEOPOLITICAL TENSIONS; IRON ORE HAVING A TOUGH WEEKBase metals traded mostly higher yesterday, with copper an exception. The 3m LME contract for copper fell 0.64% (-$64/tonne from the previous day's close) to $9,929/tonne, while aluminum rose 0.37% (+$12/tonne) to $3,268/tonne, nickel surged 2.05% (+$480/tonne) to settle at $23,886/tonne and zinc climbed 0.61% (+$22/tonne) to $3,606/tonne.Despite a slump in the stock market amid rising geopolitical tensions, most base metals moved higher yesterday, supported by fears over a disruption in the supply of raw materials from Russia. On the other hand, copper, the barometer of the global economy, slipped given the negative implications for the global economy. We expect the situation along the Ukrainian border to continue affecting base metals, with aluminum likely to remain the most sensitive to new developments. In the event of escalation, we would expect aluminum to outperform, pulling the rest of the base metals higher.It has been a painful week for iron ore. Futures in Singapore are now quoted at around $132/tonne, down almost 9% from the local peak of $153/tonne reached on February 10. Chinese authorities have already used many of the tools in their regulatory arsenal to crack down on speculation in the market, but we believe there are some additional instruments that could be deployed to tame prices, though probably after the Olympics have ended. As soon as the restrictions on steelmaking are lifted in mid-March, non-speculative demand for iron is likely to rebound, driving prices higher. Until that time, the authorities are likely to continue supervising port stocks and communicating with domestic and international traders. Meanwhile, congestion at ports and longer deliveries of iron ore to steel mills will keep prices from moving too far below the current