Commodities Daily - February 4, 2022

> Oil advances on weaker dollar following hawkish ECB meeting. Brent has inched even higher this morning and is trading near $91.5/bbl, with investors today primarily eyeing US nonfarm payrolls for January and the weekly Baker Hughes US rig count. We expect Brent to stick near $91.5/bbl today, as the rig count data is likely to underscore US producers' struggles in the face of a winter storm, while we think the nonfarm payrolls are set to disappoint.> Gold steady ahead of US jobs report. Gold traded sideways near $1,805/oz yesterday, while the 10y US Treasury yield rose from 1.77% to 1.84%. Gold is trading near $1,805/oz as we write. Markets await the January jobs report from the US and December retail sales data from the eurozone. We expect bullion to trade in a $1,800-$1,810/oz corridor today.> Base metals mixed, with aluminum an outperformer. Base metals were mixed yesterday. The price movement was relatively moderate given the subdued trading volumes in China due to the Lunar New Year holiday. Aluminum was an exception; it posted a more than 2% gain on concerns over record tightness in the market this year.OIL ADVANCES ON WEAKER DOLLAR FOLLOWING HAWKISH ECB MEETINGBrent slid $1.4/bbl to $88/bbl yesterday before rallying to as high as $91.3/bbl, mirroring a surge in EUR/USD after the ECB stunned investors by not ruling out a rate hike this year given the inflationary risks. ECB President Christine Lagarde said there was a determination around the table not to rush into a decision without a proper and thorough assessment based on data and analytical work that will take place over the next few weeks. Money markets are now pricing in the ECB hiking by a total of 40 bps through December, compared with 25 bps on Wednesday. The BoE raised rates by a quarter of a point yesterday; only opposition from Governor Andrew Bailey prevented an even bigger move. The Fed is poised to remove stimulus in March.A massive winter storm hammering Texas, which is threatening to shut some output in a region that produces almost 5 mln bpd. The storm has triggered memories of the deadly Arctic blast that knocked out the state's power grid almost a year ago, which removed 1.3 mln bpd of production for three weeks. US oil production is already down 0.2 mln bpd this year at 11.5 mln bpd due to the cold winter, according to EIA estimates. However, this time the power grid appears to be holding steady, though the deep freeze is expected to last until tomorrow. Officials do not expect to call for rolling blackouts as they did last year, when power plants went down across the state, leaving insufficient electricity to go around in the face of surging demand. Front-month Brent ended yesterday at $91.11/bbl, down $1.64/bbl on the day.Brent has inched even higher this morning and is trading near $91.5/bbl, with investors primarily eyeing today's US nonfarm payrolls for January and the weekly Baker Hughes US rig count. We think Brent is unlikely to give back yesterday's gains and expect it to stay near $91.5/bbl, as the rig count data will highlight US producers' struggles with the winter storm, and we think the nonfarm payrolls are likely to disappoint. We expect very weak job growth in January amid a surge Omicron cases that were rising at about 800k per day, five times the pace at the peak of the Delta wave. Worker absenteeism and temporary business closures were prevalent during the month. This also weighed on motor fuel demand. All this has placed a damper on our initial expectation that hiring would pick up after the holiday season as US households seek to improve their financial cushion. Nevertheless, we expect this trend to resume once the Omicron wave subsides in LD STEADY AHEAD OF US JOBS REPORTGold traded sideways near $1,805/oz yesterday, while the 10y US Treasury yield rose from 1.77% to 1.84%. EUR/USD rallied from 1.130 to 1.143, which supported bullion. Yesterday's US macro data provided headwinds for gold, while hawkish remarks from ECB President Christine Lagarde and a quarter-point rate increase by the BoE created tailwinds, as they caused the dollar to weaken. The Markit January PMIs for the US were little changed versus the preliminary readings, while the ISM services PMI reading for January was upbeat at 59.9, only slightly below December's 62. The ISM survey indicated that the supply and labor shortages have persisted, while rising prices have dented business optimism. Meanwhile, weekly US initial jobless claims continued to drop, coming in below consensus, and December factory orders in the US were in line with expectations. So, all in all, yesterday's data was generally upbeat and hence negative for gold. As for the central bank meetings, the ECB kept rates on hold, as expected, but President Christine Lagarde's tone was quite hawkish in the post-meeting press conference. She indicated that the ECB was worried about inflation and acknowledged that rate hikes were possible in 2022. Additionally, the BoE delivered its second rate hike this year and suggested more are on the way. During the Asian trading session today, gold was quoted near $1,805/oz. Markets await the January jobs report from the US and December retail sales data from the eurozone. Since the labor market remains a key focus for the Fed, the January jobs data will be the main focus. The consensus envisages 125k jobs added in January, but the downside risks seem significant given the more than 300k decrease in private payrolls reported by ADP earlier this week. Nonetheless, we think the risks are also skewed to the downside for gold. A weak nonfarm payroll figure would most likely not be enough to derail the hawkish shift at the Fed, while a strong increase in average hourly earnings could further fuel concerns over inflation. On the other hand, a strong payrolls reading could put significant pressure on gold, as it would indicate that the labor market has held up against the spread of the Omicron variant. Even though we think the jobs data will be quite weak, we see gold holding in a $1,800-$1,810/oz corridor SE METALS MIXED, WITH ALUMINUM AN OUTPERFORMERBase metals were mixed yesterday. The 3m LME contract for copper was almost flat at $9,833/tonne, aluminum rose 2.14% (+$64/tonne) to $3,050/tonne, nickel remained unchanged at $22,866/tonne and zinc edged down 0.37% (-$13/tonne) to $3,597/tonne.Investors continued to ponder how the Fed will kick off its tightening cycle. Although the dollar remained in a downtrend, most base metals posted only modest changes in price, which was probably because of the subdued trading volumes in China due to the Lunar New Year holiday. Aluminum was an exception, gaining around 2% on fears of strong undersupply this year. According to Bloomberg, Russia's Rusal said that it expects a 1.6-1.7 mt deficit in 2022, which would be supportive for prices. We believe the market will experience record tightness this year, with the effect of the smelting capacity ramp-up in China offset by the impact of the ongoing energy crisis in Europe, which is causing shutdowns of aluminum smelters. With the power crunch far from being resolved due to geopolitical unrest, Europe is likely to remain short on gas in the months to come. This will keep electricity prices elevated, making aluminum smelting (an energy-intensive process) uneconomical. A reduced supply of aluminum from a region where electricity prices are at record highs will exacerbate the market imbalance, which will be positive for prices. We believe the 3m LME contract for aluminum might test its October high of $3,172/tonne in the near