Commodities Daily - January 10, 2022

> Oil prices stabilize after rallying last week as supply restored in Libya and Kazakhstan. This morning, Brent slid to as low as $81.3/bbl amid pressure from the return of supply in Libya and Kazakhstan, though it has since recovered to around $82/bbl. There are no major data releases or oil market events on today's agenda. We think Brent is likely to hold near $82/bbl for the remainder of the day, as investors will remain cautious over the coronavirus situation in China as the global oil supply interruptions fade.> Gold edges higher as US nonfarm payrolls disappoint. Gold rose from $1,790/oz to $1,795/oz on Friday, while EUR/USD firmed from 1.130 to 1.136. Gold is trading near $1,790/oz as we write. Today, the market awaits US wholesale inventories for November. We expect bullion to trade in a $1,785-1,800/oz corridor.> Base metals mixed, with zinc and aluminum outperforming; iron ore set to start consolidating again. Base metals have been trading mixed so far in 2022, with supply disruptions in the zinc and aluminum markets amid the energy crisis in Europe allowing the two metals to outperform the rest of the pack. Meanwhile, the spread of the Omicron variant in China has been a headwind for demand. We expect iron ore to start consolidating again after a brief rally.OIL PRICES STABILIZE AFTER RALLYING LAST WEEK AS SUPPLY RESTORED IN LIBYA AND KAZAKHSTANOn Friday, after peaking at $83/bbl, Brent began to slide toward $81.4/bbl, with headwinds coming from a pullback in US stock markets after the December employment report sparked fears that the Fed will be forced to raise rates faster than some investors had anticipated. The US unemployment rate fell below 4% in December, and wages jumped despite disappointing jobs growth, adding to the evidence that the US labor market is becoming a bit tight. The minutes to the December FOMC meeting, which were released in the middle of last week, also fueled expectations that lift-off will come sooner than had been expected, as they indicated that the Fed was ready to hike rates to combat inflation. The minutes drove a decline in the S&P 500, and Friday's hiring report did little to assuage concerns about a rate hike as early as March. According to Bloomberg, the market is now pricing in an 88% chance of an interest rate hike in March. All in all, investor appetite for risk assets, including commodities, has been in focus early this year, as the above-mentioned events drove a surge in benchmark US Treasury yields. On Friday, front-month Brent settled at $81.75/bbl, fixing $0.24/bbl below the previous settlement.This morning, Brent slid to as low as $81.3/bbl amid pressure from the return of supply from Libya and Kazakhstan, though it has since recovered to around $82/bbl. Libyan production rose to 0.9 mln bpd after maintenance was completed, while some output has been restored in Kazakhstan following the unrest that crimped supplies last week. Oil has gotten off to a strong start in 2022, pressing higher amid optimism over global demand (investors' worries over the impact of Omicron have eased) and interruptions to supplies not only in Libya and Kazakhstan, but also in Nigeria. A deep freeze has also disrupted oil flows in Canada and the northern US. There are no major data releases or oil market events on today's agenda. We think Brent is likely to hold near $82/bbl for the remainder of the day, as investors will remain cautious over the coronavirus situation in China as the global oil supply interruptions fade.This week, the oil market will be focused on the US-Russia talks over Ukraine, which could have implications for natural gas prices, and a slew of economic data from China. Inflation numbers are due from China on Wednesday, while Friday's trade data, which will include crude import figures, should help investors gauge Chinese demand for commodities. This data will be especially important given the growing concerns over demand following the detection of Omicron in China, and it will help shape the outlook for recovery after a tumultuous year for China's economy, which has led to talk of more rate cuts. The monthly EIA oil market report is due on Tuesday, while US CPI and PPI figures are slated for release on Wednesday and Thursday, LD EDGES HIGHER AS US NONFARM PAYROLLS DISAPPOINTGold rose from $1,790/oz to $1,795/oz on Friday, while EUR/USD climbed from 1.130 to 1.136. The US 10y Treasury yield increased from 1.72% to 1.76%, creating a headwind for bullion. YTD, bullion has slid from $1,830/oz on the back of a 25 bp surge in the 10y Treasury yield. This was driven by hawkish minutes and rhetoric from the Fed. Macro data for December has so far been mixed, providing lukewarm support for bullion. The US ISM manufacturing and services PMIs came in below expectations, while the latest nonfarm payrolls brought 199k new jobs, well below the 450k expected. The overall US employment rate slid to 3.9% and average earnings rose 0.6% (0.4% consensus). The latter augurs rising inflation expectations, which could cause the Fed to adopt a more hawkish stance. The FOMC minutes showed that the majority of FOMC members are receptive to a more aggressive monetary policy. Some members believe that the labor market is on track to reach maximum employment, according to the minutes. St Louis Fed President James Bullard said the FOMC could start hiking at the March meeting to curb inflation. San Francisco Fed President Mary Daly said she would prefer to bring down the record high balance sheet after one or two rate hikes, which would be earlier than during the previous cycle. Gold is trading near $1,790/oz as we write. Today, the market awaits US wholesale inventories for November. This week will also see Fed Chair Jerome Powell testifying before the US Congress, US CPI and PPI inflation data for December, US retail sales and industrial production for December, and the preliminary University of Michigan consumer sentiment index for January. Powell's testimony and the inflation numbers will be the key points this week and could provide clues to the Fed's future policy moves and create pressure for bullion. However, today we expect bullion to trade in a $1,785-1,800/oz SE METALS MIXED, WITH ZINC AND ALUMINUM OUTPERFORMING; IRON ORE SET TO START CONSOLIDATING AGAINBase metals have been trading mixed so far in 2022. Three-month LME contracts on copper are down 0.76% YTD (-$74/tonne) at $9,647/tonne, aluminum is up 3.81% (+$107/tonne) at $2,915/tonne, nickel is about flat at $20,730/tonne (though it climbed above $21,000/tonne at the very beginning of the year) and zinc is also flat at $3,530/tonne (although it had been following aluminum higher before doing a U-turn).As we had expected, the rally in the zinc and aluminum markets has continued this year, with orders for both metals from LME warehouses on the rise. Despite a plunge in natural gas prices at the end of 2021, the energy crisis remains in full swing. Elevated energy costs have forced European smelters to reduce their aluminum output (around 600 ktpa of capacity is currently offline in the region, according to CRU), and zinc smelting capacity remains muted following last year's cuts. The political unrest in Kazakhstan has also been supportive for zinc and copper prices, as both metals are widely produced in the country and the potential for supply disruptions provides upside risk. With no solution to the power shortage in Europe within sight, the supply risks for aluminum and zinc persist, though they seem to be partly priced in. We believe there is still some upside potential for the two metals, though much will depend on how the energy crisis plays out.The spread of the Omicron variant has obviously been negative for metals demand, though past outbreaks of new variants have left supply mostly unscathed. Investors are now tracking the spread of Omicron in China, a key producer and consumer of metals. While China may formally maintain a zero-Covid policy, there is a good chance the authorities will begin to take a more targeted approach given that Omicron is less deadly than Delta and that the country is returning to economic stimulus. Nonetheless, investors see the spread of the virus in China as a headwind, and iron ore futures have come under pressure following a brief rally at the beginning of this year. We expect the general trend of consolidation in the iron ore market that started at the end of last year to continue through 1Q22 despite easing monetary policy in China. Weaker demand for the raw material, which is used in steelmaking, due both to restrictions during the heating season and steel output cuts ahead of the Olympics, remains the key headwind for iron ore