Commodities Daily - January 11, 2021

> Oil slides on stronger dollar and rise in Chinese coronavirus cases. No major events or economic releases are scheduled for today, so investors are likely to concentrate on the strengthening dollar, which is negative for oil, as well as news from China, where Covid cases are mounting and new lockdown measures are being introduced. We expect these factors to push Brent into the $54.7-55.2/bbl support zone later today, though with Brent already trading in overbought territory, it is due for a correction. However, we do not anticipate a substantial correction given US President-elect Joe Biden's recent proposal of a large stimulus package.> Gold prices plummet as US Treasury yields climb. The spotlight today will be on scheduled remarks from Fed representatives Raphael Bostic and Robert Kaplan, who could touch upon the recent rise in US rates and potential Fed actions. For the time being we think that gold is likely to remain under pressure with support levels at $1,820/oz, $1,811/oz and $1,790/oz.OIL SLIDES ON STRONGER DOLLAR AND RISE IN CHINESE CORONAVIRUS CASESBrent opened near $54.5/bbl on Friday but climbed to the $55.5/bbl mark during European trading before attempting to reach $56.5/bbl late in the US session. It eventually settled at $55.99/bbl, up $1.61/bbl on the day. Saudi Arabia's pledge last week to cut output by an extra 1 mln bpd in February and March (while most OPEC+ producers will be holding production steady during new lockdowns) remains the key factor supporting oil at the start of the year. The country has also increased its official prices for delivery to Asia, with Iraq and Abu Dhabi following suit. This has raised concerns over a swift recovery in US shale production back to 2019 highs this year given that WTI prices are consolidating above $50/bbl. However, we expect shale oil producers to focus on debt reduction this year rather than growth. This should mean that capex remains low this year, with the lion's share of planned investment going toward completing drilled but yet to be completed wells. This means the US upstream sector will look to stabilize production rather than grow output in 2021. Friday's Baker Hughes data showed that US oil rigs rose by eight units to 275 last week, their highest level since May.Aside from the bullish Saudi oil market intervention, further support for oil came late on Friday with US President-elect Joe Biden proposing trillions of dollars in stimulus to counter the economic toll of the coronavirus. This new assistance would include boosting stimulus checks to $2,000 per person (the December jobs report released on Friday was unexpectedly bad, showing a plunge in restaurant employment) and should provide a strong boost to the prospects for a recovery in oil demand this year. No major events or economic releases are scheduled for today, so investors are likely to concentrate on the strengthening dollar, which is negative for oil, as well as news from China, where Covid cases are mounting and new lockdown measures are being introduced. This morning, China reported its biggest daily increase in Covid cases in more than five months, as new infections in Hebei province (which surrounds the capital, Beijing) continued to rise. Reuters has reported that Shijiazhuang, Hebei's capital and the epicenter of the new outbreak, is in lockdown, with people and vehicles barred from leaving the city. Last year, China's swift recovery was a key factor behind the oil market recovery. We expect the stronger dollar and deteriorating Covid situation in China to push Brent down to the $54.7-55.2/bbl support zone later today, though with Brent already trading in overbought territory, it is due for a correction. However, we do not anticipate a substantial correction given Biden's proposed stimulus package. This week, OPEC releases its monthly market report on Thursday, while the EIA will publish its short-term energy outlook tomorrow.GOLD PRICES PLUMMET AS US TREASURY YIELDS CLIMBHaving rallied toward $1,960/oz at the start of the year, gold prices started to slide and on Friday lost almost $90/oz and touched the $1,820/oz mark this morning. This correction comes amid a strengthening of the dollar as both real and (especially) nominal US rates rose sharply, with the yield on 10y Treasuries climbing nearly 20 bps to reach 1.1%. This occurred after it became clear that the Democrats had won both of the Senate seats up for grabs in the run-off elections in Georgia, giving them a majority in both chambers of Congress. This increases the chances of new fiscal stimulus passing under the incoming Biden administration, including expanding the $600 stimulus checks to $2,000.This has led to growing concern that inflation in the US could begin to accelerate, which has caused markets to price in an earlier start to the Fed's tightening cycle. The risks of an uptick in inflation were also reflected in the rather sharp 0.8% m-o-m increase in US wages in December, while nonfarm payrolls fell by 140k, increasing the likelihood that stimulus measures will be kept in place. Still, it is worth noting that certain members of the Fed's Board of Governors have indicated that the quantitative easing measures could start to be rolled back by the end of this year if the economy is in a good place.The dollar has continued to advance this morning amid a rise in US Treasury yields, but we note that this factor, which is negative for gold prices, could soon begin to fade if this week's US CPI and PPI data come out subdued and if Fed Chairman Powell sticks to a dovish message. Note that the US debt-to-GDP ratio is surging while rates are close to record lows. The government and the Fed certainly realize that this debt must be paid back, and the lower the rates are the cheaper it will be to service it. The spotlight today will be on scheduled remarks from Fed representatives Raphael Bostic and Robert Kaplan, who could touch upon the recent rise in US rates and potential Fed actions. For the time being we think that gold is likely to remain under pressure with support levels at $1,820/oz, $1,811/oz and $1,790/oz.