Commodities Daily - February 2, 2022

> Oil prices hold steady ahead of OPEC+ meeting. This morning, Brent is trading near $89.5/bbl following API data overnight showing inventory draws in crude oil and distillates but another strong build in gasoline stocks. Investors are waiting for the results from the OPEC+ meeting, as well as the EIA's weekly update on US inventories. In our view, Brent is likely to continue consolidating below $90/bbl today, as we think the EIA report will be mixed and that OPEC+ will stick to the plan and hike production quotas by 0.4 mln bpd in March. We also expect the ministers to comment upon the matter of compensating for the under-compliance in previous months.> Gold inches higher as Fed comments slightly reduce pressure. Gold nudged higher from $1,795/oz to $1,800/oz yesterday, while the US 10y Treasury yield rose from 1.78% to 1.79%. During the Asian trading session today, it is quoted near $1,800/oz. Today, the market awaits the US ADP employment report and a eurozone CPI reading, both for January. We expect bullion to trade in a $1,790-$1,805/oz range today.> Base metals higher on weaker dollar; iron ore paring some losses back. Base metals traded higher yesterday on a weaker dollar as the dust from last week's Fed decision settled. Meanwhile, iron ore futures have pared some of the losses that came after Chinese authorities warned of a crackdown on speculation in the market yesterday. We believe it is only a matter of time before the market reverses and prices head south.OIL PRICES HOLD STEADY AHEAD OF OPEC+ MEETINGYesterday, Brent traded sideways within a $87.7-90.0/bbl range. The big news yesterday was that the projection of the 2022 supply surplus that was shown to the OPEC+ Joint Technical Committee was little changed from last month's estimate of 1.3 mln bpd, which suggests there is not likely to be a change in the strategy of OPEC+. Meanwhile, Bloomberg data showed that OPEC output barely increased in January - it rose by just 0.05 mln bpd to 28.14 mln bpd. This is because the slight production gains across most of the group were wiped out by a 0.14 mln bpd decline in Libya, whose western fields were blockaded by militias, forcing the closure of its biggest reservoir, Sharara. The 10 OPEC nations (out of 13) participating in the accord along with non-members such as Russia increased their output by 0.16 mln bpd in January, or around two thirds of the targeted amount. One bright spot was Nigeria, where production rose by 0.1 mln bpd, with the key Forcados export system returning to normal operating levels. Yesterday, front-month Brent settled at $89.16/bbl, fixing $0.1/bbl below the previous settlement.This morning, Brent is trading near $89.5/bbl following API data overnight showing inventory draws in crude oil (-1.65 mln bbl) and distillates (-2.5 mln bbl) but another strong build in gasoline stocks (+5.8 mln bbl). Investors are waiting for the results from the OPEC+ meeting, as well as the EIA's weekly update on US inventories. In our view, Brent is likely to continue consolidating below $90/bbl today, as we think the EIA report will be mixed and that OPEC+ will stick to the plan and hike production quotas by 0.4 mln bpd in March (although we think production may only end up increasing by half this amount). We also expect the ministers to comment upon the matter of compensating for the under-compliance in previous months. As we understand, Saudi Arabia is concerned that technical momentum could push already-elevated Brent prices above the $100/bbl mark. It also seems to be worried that the market is actually far tighter than what the IEA or OPEC+ market balance estimates suggest.However, we do not expect the group to agree upon any particular actions to compensate for the under-compliance, as several delegates have attributed the recent price gains more to geopolitics than fundamentals, which suggests to us that they do not plan to change course. We also note that widespread difficulties in restoring supplies have increasingly placed a burden on the group's Gulf nations: Saudi Arabia, the UAE, Iraq and Kuwait. This has made traders nervous about how much spare capacity OPEC+ has to cover any potential disruptions, such as further supply losses in Libya or another attack like last month's drone strike in Abu LD INCHES HIGHER AS FED COMMENTS SLIGHTLY REDUCE PRESSUREGold nudged higher from $1,795/oz to $1,800/oz yesterday, while the US 10y Treasury yield rose from 1.78% to 1.79%. Meanwhile, EUR/USD appreciated from 1.123 to 1.127. The macro backdrop seemed to work against gold, while Fed officials downplayed concerns of an aggressive 50 bp rate hike in March, which helped gold to finish slightly higher. JOLTS job openings for December showed nearly 11 mln vacancies (10.3 mln consensus), a sign of an improving labor market. In addition, the ISM and Markit US manufacturing PMIs for January slightly beat expectations, supporting the view that the economy was not severely impacted by record Covid cases and high inflation. However, these headwinds for gold were countered by comments from St Louis Fed head James Bullard, known as a hawk, who said that five rate hikes "is not too bad a bet" while saying he did not favor a 50 bp rate hike next month. In addition, Philadelphia Fed President Patrick Harker also said he was in favor of a 25 bp rate hike and would support a bigger hike only if inflation were to spike.During the Asian trading session today, gold is quoted near $1,800/oz. Today, the market awaits the US ADP employment report and a eurozone CPI reading, both for January. The consensus expects 184k private payroll additions, after more than 800k reported by the ADP in December. We think that a near-consensus reading could help gold to consolidate near current levels, though a slight downward move ahead of the release is possible. Still, gold is unlikely, in our view, to break through the current corridor as the ADP data should not significantly change market expectations ahead of Friday's official jobs report. We expect bullion to trade in a $1,790-$1,805/oz range SE METALS HIGHER ON WEAKER DOLLAR; IRON ORE PARING SOME LOSSES BACKBase metals advanced yesterday. The 3m LME contract for copper rose 2.00% (+$191/tonne from the previous day's close) to $9,697/tonne, aluminum added 0.38% (+$12/tonne) to $3,033/tonne, nickel gained 1.95% (+$436/tonne) to settle at $22,764/tonne and zinc edged higher 0.46% (+$14/tonne) to $3,603/tonne.The uptick in base metals quotes came on a weaker dollar as the dust from last week's Fed decision settled. The DXY index is now back to its long-persisting range between 95.5 and 96.5 points. There is still more than a month before the next Fed meeting, which will probably bring the first interest rate hike and add pressure to risk assets. Until then, we may see some more upward movement across base metals, with investors likely to remain focused on the backwardation in the markets and prices remaining supported by the European energy crisis (responsible for the considerable premium currently priced in most base metals).Iron ore futures in Singapore are back on the rise, even though Chinese authorities have warned of a crackdown on speculation as prices have surged more than 70% since mid-November. The price movement is underpinned by expectations that infrastructure spending in China will boost demand for steel and the key ingredient for making steel, iron ore. However, we do not expect a surge in iron ore demand from Chinese steelmakers this year, as the authorities will probably keep annual steel output below or on par with last year. In addition, there is a number of fundamental factors that do not seem to correspond with the rising iron ore prices (for example, the Baltic Dry Index, which has a negative correlation with iron ore futures, is now back at its historical average), implying the recent rally is speculative in nature. If history is a guide, Chinese authorities will not give up on their intention to cool down the market, with more verbal interventions likely to be followed by policy action (e.g. price caps, more local mining and trade supervision). We expect iron ore futures to turn south in the weeks to