Commodities Daily - February 3, 2022

> Oil keeps trading sideways following OPEC+ meeting, EIA inventory report. This morning, Brent is hovering above $89/bbl, with investors eying the BoE and ECB rate decisions, as well as the eurozone and US services PMIs for January and Shell and ConocoPhillips 4Q21 earnings. In our view, today Brent is likely to continue consolidating below $90/bbl. Another move higher will require a bullish catalyst, which is currently lacking, while support around $88/bbl remains strong.> Gold moves higher following unexpectedly weak US employment report. Gold climbed from $1,800/oz to $1,805/oz yesterday, while the US 10y Treasury yield slid from 1.79% to 1.77%. Gold is still trading near $1,805/oz as we write. Today, the market awaits the ECB's monetary policy decision and press conference and the January ISM services PMI for the US. We expect bullion to trade in a $1,800-$1,810/oz range today.> Base metals continue to rise on weak dollar; iron ore still climbing. Base metals continued to trade mostly higher yesterday, as Fed officials talked down the prospect of aggressive monetary tightening. Such rhetoric is likely to keep base metal prices elevated until the FOMC meeting in March. Iron ore continues to rise on expectations of stronger steel demand in China this year, while a potential crackdown by the authorities on speculation is in focus.OIL KEEPS TRADING SIDEWAYS FOLLOWING OPEC+ MEETING, EIA INVENTORY REPORTAround midday yesterday, Brent spiked $1.85/bbl to an intraday high of $90.50/bbl following a very brief OPEC+ meeting at which the group ratified a March production increase of 0.4 mln bpd without addressing the issue of under-compliance over previous months. Without guarantees to compensate for the underproduction from OPEC+, the basic market understanding is that the group is struggling to raise output and that each output hike puts strong pressure on OPEC+ spare capacity, and with more barrels coming online, there is a smaller buffer to cushion any supply shocks. Oil prices rose after the meeting, also on speculation that OPEC+ might at least discuss speeding up production increases. All in all, we think production may only end up increasing by half of the planned 0.4 mln bpd in March, which would be price supportive. A factor that would strongly weigh on prices is a potential Iranian nuclear deal, and talks between Iran and the West are making headway after months of delays. In our view, the chances of an agreement to restore the deal have risen. Following the OPEC+ meeting, Iran's oil minister said that Iran is ready to supply oil markets in the "fastest time," saying that the US should ease its sanctions to help tightly supplied markets and ease prices. Iranian barrels would only hit the market in 3Q22, however, as actual sanctions relief would still take several months to take effect. Still, headlines of a breakthrough would undoubtedly cause a short-term drop in prices. The Iranian minister's comments weighed on prices yesterday, with Brent diving below $90/bbl ahead of the weekly EIA inventory report. According to the EIA, US total crude and petroleum supplies excluding the SPR dropped to the lowest level since April 2018. The bulk of the decline was driven by draws in distillates (-2.4 mln bbl w-o-w) and propane (-4.3 mln bbl). Crude oil production fell again last week, supporting a 1 mln bbl crude stock draw. This marks the third production drop in four weeks and takes the volume pumped to the lowest level in 10 weeks, back to where it was in mid-November. This could have been due to cold weather. US gasoline demand, meanwhile, slipped w-o-w but on a four-week rolling basis rose for the first time since late December. Gasoline inventories continued to build (+2.1 mln bbl w-o-w), mostly on the US Atlantic Coast, offsetting a dip on the US Gulf Coast. Propane supplied on a four-week basis, a gauge of demand, rose to a record for the second straight week. Front-month Brent eventually settled yesterday at $89.47/bbl, fixing $0.31 above the previous settlement.This morning, Brent is hovering above $89/bbl, with investors eying the BoE and ECB rate decisions, as well as the eurozone and US services PMIs for January and Shell and ConocoPhillips 4Q21 earnings. In our view, today Brent is likely to continue consolidating below $90/bbl. Another move higher will require a bullish catalyst, which is currently lacking, while support around $88/bbl remains LD MOVES HIGHER FOLLOWING UNEXPECTEDLY WEAK US EMPLOYMENT REPORTGold rose from $1,800/oz to $1,805/oz yesterday, while the US 10y Treasury yield declined from 1.79% to 1.77%. EUR/USD firmed from 1.127 to 1.130, creating a tailwind for bullion. The eurozone CPI reached a record high of 5.1% y-o-y in January, well above the 4.4% consensus. Rising inflation in Europe supports gold, as it causes investors to anticipate more aggressive action from the ECB to bring it down. Investors were particularly looking out for the ADP employment yesterday as an early indicator for this Friday's nonfarm payrolls report. The ADP data surprised to the downside, dropping by 301k in January, the lowest reading since the pandemic began, versus the consensus of a 180k rise. The decline was led by the leisure and hospitality industries, as Omicron provoked restrictions on businesses and muted the population's activity. However, the impact on jobs growth will likely be temporary and should not significantly derail the labor market recovery, in our view. Bullion found support from this yesterday, as labor market weakness could cause the Fed to tighten monetary policy less avidly than it is currently signaling.Gold is still trading near $1,805/oz as we write. Today, the market awaits the ECB's monetary policy decision and press conference and the January ISM services PMI for the US, as well as the eurozone PPI, US factory orders (both for December), and the US weekly initial jobless claims. Gold is unlikely to exhibit significant volatility today in anticipation of tomorrow's labor market data. Despite the extremely weak ADP data, there is usually a certain disparity between the ADP report and the official statistics. Omicron is a temporary factor, so February could see a recovery in the labor market. We don't expect the payrolls data to derail the Fed from its hawkish monetary policy turn while inflation is at record levels. The ECB meeting might provide some support for gold, as the regulator could give slightly hawkish signals given the eurozone inflation picture, which could prove positive for gold as it could weaken the dollar. We expect bullion to trade in a $1,800-$1,810/oz range SE METALS CONTINUE TO RISE ON WEAK DOLLAR; IRON ORE STILL CLIMBINGBase metals were mostly higher yesterday, although aluminum was an exception. The 3m LME contract for copper was up 1.47% (+$143/tonne from the previous day's close) at $9,840/tonne, aluminum dropped 1.53% (-$47/tonne) to $2,986/tonne, nickel edged higher 0.45% (+$102/tonne) to settle at $22,866/tonne and zinc was up 0.21% (+$7/tonne) to $3,610/tonne.The dollar continued to fall for a third day in a row yesterday amid a recovery in risk appetite. This was positive for commodities: copper, the most sensitive of all base metals, recovered recent losses almost in full. We believe that Fed officials will continue to talk down the prospects of an aggressive monetary tightening until the next meeting in March. This is likely to put a lid on the greenback and support dollar-denominated commodities.Meanwhile, iron ore futures in Singapore are extending gains, driven by expectations that Chinese infrastructure spending will underpin steel demand and subsequently demand for iron ore, the key ingredient in steel-making. We expect iron ore futures to drop during the Olympic games in Beijing on weak demand for iron ore due to emissions restrictions. Shall prices go higher, the crackdown from the authorities will put a lid on prices after the Lunar New Year period. In any case, we think speculative momentum will give way to fundamentals, which imply a much lower level for iron ore prices. The key risk to the upside remains subdued exports from Australia, which is responsible for circa 60% of total iron ore supply but is now fighting with a wave Covid-19