Commodities Daily - February 8, 2022

> Oil prices ease with Iran nuclear talks back in focus. This morning, it is trading near $92.5/bbl. Aside from the Iran nuclear talks, investors are also eyeing the monthly EIA oil market report and weekly API data on US oil and refined products inventories (due overnight). During the current, final stage of the Iran nuclear talks, there is very strong downside hanging over the oil market, which could materialize at any moment if the deal is restored. In our view, today Brent is likely to ease toward $91/bbl as investors will be cautiously pricing in a restoration of the JCPOA.> Gold higher amid inflation worries. Gold rose from $1,805/oz to $1,820/oz yesterday, while the 10y US Treasury yield remained steady near 1.91%. Bullion is trading near $1,820/oz as we write, and we expect it to trade in a $1,810-1,825/oz corridor today. The market awaits the NFIB small business optimism index for January. > Base metals mostly higher; aluminum might see some profit taking; thermal coal further decoupling from natural gas prices. Base metals mostly traded higher yesterday, with copper an exception. The rally in the aluminum market continued amid persisting supply fears, with prices moving closer to the highs from last October. We think there could be some profit taking before the metal reaches new highs. Thermal coal continued to rise amid the disruption in seaborne supply, with prices moving further from parity with natural gas.OIL PRICES EASE WITH IRAN NUCLEAR TALKS BACK IN FOCUSAfter peaking at $94/bbl early yesterday, Brent eased into a $92-93/bbl range after the news emerged that diplomats in Vienna will resume the Iran nuclear negotiations today, which could unlock sanctioned Iranian oil for global markets. This comes after the US signed several waivers related to Iran's civilian nuclear activities in order to ease diplomatic efforts. Front-month Brent eventually settled at $92.69/bbl, fixing $0.58/bbl below the previous settlement. This morning, it is trading near $92.5/bbl. Aside from the Iran nuclear talks, investors are also eyeing the monthly EIA oil market report and weekly API data on US oil and refined products inventories (due overnight). During the current, final stage of the Iran nuclear talks, there is very strong downside hanging over the oil market, which could materialize at any moment if the deal is restored. In our view, today Brent is likely to ease toward $91/bbl as investors will be cautiously pricing in a restoration of the JCPOA. The Russian daily Kommersant, citing Russia's chief negotiator at the talks Mikhail Ulyanov, reported that a final agreement is already on the table, though there are still several issues left to resolve, with some considering rather fundamental. If and when they are resolved, a period of preparation for the deal's implementation will begin, which may take a month or two. Another highlight from the newspaper article was that an intermediate solution at this stage is seen as unsuitable and not being considered, with all attention focused on restoring the original JCPOA.Besides Iran, which has around 90 mln bbl of oil in storage and could increase production by 1 mln bpd in a matter of months, the only other potential source for a near-term supply increase is the US. However, producers are focused on capital discipline, so this remains a more distant possibility. Strong US production growth risks resurfaced last week when two US majors reported strong 4Q21 financial performances and guided for robust growth in 2022, which could mean a return to the strong US shale growth rates of previous years, especially now that FCF is surging. Another factor that could cap the upside to prices in the near term and a temporary correction is the start of the refinery maintenance season, which will globally peak in LD HIGHER AMID INFLATION WORRIESGold rose from $1,805/oz to $1,820/oz yesterday, while the 10y US Treasury yield remained steady near 1.91%. Meanwhile, EUR/USD slid from 1.145 to 1.143. Yesterday, ECB President Christine Lagarde signaled less hawkish monetary policy adjustments than she had last week. She expects the elevated inflation to prove temporary and near the 2% target over the medium term, indicating in that case that there will be no need for "measurable tightening." Investors are also worried about inflation growth, which provided some support to gold given the lack of new comments from the Fed (last week's comments were quite mild). Such inflationary factors as wage growth and higher energy prices also fuel these expectations. However, these gold-supportive factors may turn out to be temporary, particularly if the Fed turns more hawkish due to the significant strengthening of the US labor market. Hedge funds cut their net-long positions in gold to the lowest level in 18 weeks (according to the last CFTC report) last week, while ETF holdings also decreased.Gold is near $1,820/oz during Asian trading today. The market awaits the NFIB small business optimism index for January and US trade balance for December. Gold prices may try to consolidate at current levels ahead of the US CPI publication on Thursday and new Fed comments (the soonest of which are due tomorrow). The small business optimism index is expected to have slid last month, which will probably be slightly positive for gold. We expect bullion to trade in a $1,810-$1,825/oz corridor SE METALS MOSTLY HIGHER; ALUMINUM MIGHT SEE SOME PROFIT TAKING; THERMAL COAL FURTHER DECOUPLING FROM NATURAL GAS PRICESBase metals mostly traded higher yesterday, with copper an exception. The 3m LME contract for copper fell 0.65% (-$64/tonne from the previous day's close) to $9,8778/tonne, while aluminum surged 1.89% (+$58/tonne) to $3,132/tonne, nickel added 1.77% (+$407/tonne) to settle at $23,398/tonne and zinc climbed 0.35% (+$13/tonne) to $3,625/tonne.While copper continued to underperform given its sensitivity to Chinese economic activity, other base metals pressed higher on the back of worldwide production shortages. Aluminum extended its rally yesterday amid persisting supply worries and hit $3,200/tonne in this morning's trading on the LME, according to Bloomberg. This is not far from the all-time intraday high of $3,229/tonne reached on October 18 last year (the contract went on to finish the day at $3,168/tonne). While the overall bullish sentiment in the market seems to be a contributing factor, we believe the rally is fundamentally sound. With the supply disruptions in China and Europe in full swing, the cash-3m spread for aluminum reached an all-time high of $40/tonne yesterday. Although technical indicators suggest that aluminum is overbought, which could lead to some profit taking at the current levels, over the longer term the ongoing supply issues and elevated energy prices are likely to keep aluminum near these levels, while further negative news on the supply side could push quotes to new highs.Thermal coal prices have been moving higher in recent days, most likely driven mainly by still-tight seaborne supply. While Indonesia has been allowing one miner after another to export coal after complying with its "domestic market obligation" (miners have to sell at least 25% of their thermal coal in the domestic market at a capped price of $70/tonne), unfavorable weather conditions and a resurgence in Covid-19 cases have hampered the mining of coal and its delivery to key importers. If not for these factors, we estimate that Newcastle coal would be trading at around $150/tonne given the current gas prices. As soon as these factors fade away, we expect to see a tighter correlation between thermal coal and natural gas