Commodities Daily - January 12, 2022

> Oil prices rise ahead of weekly EIA inventory data. Today, investors will eye the weekly EIA inventory report and December US CPI data. We think Brent will most likely hold within the current $83-84/bbl range amid an expected ease in US consumer price pressures and EIA inventory data being less downbeat than in the recent API report.> Gold prices pushed higher by less hawkish than expected Powell comments. Gold rose from $1,800/oz to $1,820/oz yesterday, while the 10y US Treasury yield slid from 1.75% to 1.73%. Gold is still trading near $1,820/oz as we write. Today, markets await US CPI data for December and eurozone industrial production numbers for November. We expect bullion to test support at $1,810/oz today.> Base metals rally at odds with hawkish Fed rhetoric; iron ore nearing peak. Base metals rallied yesterday despite hawkish comments by Fed Chairman Jerome Powell. Today's US CPI print is in focus after Chinese inflation data showed that the peak in inflation might be behind. Iron ore futures are pushing higher, but we see headwinds from fundamentals emerging soon.OIL PRICES RISE AHEAD OF WEEKLY EIA INVENTORY DATAYesterday, front-month Brent gained as much as $3.1/bbl, rallying toward $84/bbl. The move paralleled the gain in equity markets, the advance in which primarily came after comments by Fed Chairman Jerome Powell that were more dovish than what was seen in the recent Fed minutes and what was heard from other Fed speakers in the last few days. Meanwhile, the dollar weakened, which also supported oil prices. Powell said that it may take several months to make a decision on running down the Fed's $8.8 trln balance sheet. He also stated definitively that the Fed would end the asset purchases in March, as currently scheduled. He also argued that much of the inflationary pressure the US is experiencing will ebb on its own, as supply-chain snafus and labor-force shortages associated with the pandemic ease. Brent eventually settled at $83.72/bbl yesterday, fixing $2.85/bbl above the previous settlement. Another highlight of the day was the monthly EIA oil market report. The agency still expects global production to outpace global consumption, resulting in a 0.5 mln bpd stock build. Note that it revised 2022 demand expectations higher (led by the US) and also revised higher Indian demand despite surging Covid-19 cases in the country. The EIA also revised down its 2022 non-OPEC supply forecasts, with the largest downward revisions being for Latin America and the US. The EIA's downward revision to non-OPEC production means that more barrels will be required from OPEC in 2022 versus what was envisaged last month. Another important takeaway from the report is that the 2023 forecast was released for the first time. It shows US annual oil production is set to rise to a record as shale producers continue to boost output. Crude oil supply next year is expected to average 12.41 mln bpd, which would surpass the current annual high of 12.3 mln bpd set in 2019.This morning, Brent is hovering below $84/bbl, with headwinds coming from the API report that overnight showed a weekly decrease in oil stocks (-1.1 mln bbl) and vast builds in gasoline (+10.9 mln bbl) and distillates (+3 mln bbl). Today, investors will eye the weekly EIA inventory report and December US CPI data. We think Brent is most likely to hold within the current $83-84/bbl range amid an expected ease in US consumer price pressures and EIA inventory data being less downbeat than the one in the recent API report. However, if the December CPI figures show inflation climbing above the consensus, this would encourage more Fed officials to signal their preference for a first rate hike as soon as the March meeting. This would in turn weigh on risk LD PRICES PUSHED HIGHER BY LESS HAWKISH THAN EXPECTED POWELL COMMENTSGold rose from $1,800/oz to $1,820/oz yesterday, while the 10y US Treasury yield slid from 1.75% to 1.73%. Meanwhile, EUR/USD rose from 1.133 to 1.137, creating tailwinds for bullion. On the macro data front, the NFIB US small business optimism index printed at a slightly higher level in December than was expected. While this was negative for bullion, it did not prevent gold prices from surging on the back of comments from the Fed chairman that were less hawkish than many had expected. At his confirmation hearing in Congress yesterday, Jerome Powell said that the Fed could pull off the task of bringing down inflation without harming the economy, noting that monetary policy is still far from restrictive. He added that much of the inflation in the US has been due to supply chain bottlenecks and labor market shortages, and that these pressures will ebb on their own. He did not comment on the timing of liftoff (as other Fed representatives did yesterday), nor did he mention when exactly the Fed might start reining in its nearly $9 trln balance sheet (he merely indicated that the reduction would begin this year). His comments supported gold prices, as they alleviated concerns over aggressive policy tightening. However, Cleveland Fed President Loretta Mester and Atlanta Fed President Raphael Bostic both spoke out yesterday in favor of a quarter-point rate hike as soon as March. During the Asian trading session today, gold was still near the $1,820/oz mark. Today, markets await US CPI data for December and eurozone industrial production numbers for November. The consensus for the headline US inflation readings is 0.4% m-o-m and 7.0% y-o-y. A high y-o-y figure would create pressure for bullion, as it could lead to further hawkish comments from policymakers and fuel expectations of more aggressive tightening ahead of the FOMC meeting on January 25-26. We expect bullion to test support at $1,810/oz today. However, if the US CPI readings are weaker than expected, as the CPI and PPI prints from China were this morning, this could help gold consolidate at the current SE METALS RALLY AT ODDS WITH HAWKISH FED RHETORIC; IRON ORE NEARING PEAKBase metals closed with gains yesterday. The 3m LME contract for copper was up 1.63% (+$156/tonne from the previous day's close) at $9,720/tonne, aluminum added 1.31% (+$38/tonne) to $2,970/tonne, nickel surged 4.78% (+$995/tonne) to $21,794/tonne and zinc gained 2.27% (+$79/tonne) to $3,556/tonne.The surge in quotes came despite Fed Chairman Jerome Powell's hawkish comments yesterday, as he reassured investors that the Fed is able to contain inflation without hurting the economy. However, we believe yesterday's market rally suggests that the market doubts that, which kept all base metals prices above their 50-, 100- and 200-day moving averages. We believe there could be a further reassessment of the Fed's stance in the days to come, with some clarity coming after today's US consumer inflation print.Meanwhile, the latest Chinese inflation data suggested that the peak in price levels had been passed. Both the December CPI and PPI inflation prints came in below expectations and are seemingly headed lower. The government's efforts to secure energy supplies and stabilize prices continued to help to tame factory-gate inflation, in our view. Meanwhile, given the correlation between the Chinese PPI and US CPI dynamics in recent years, this could be an indication of a U-turn coming for US consumer inflation in December. Whether or not the US CPI follows the Chinese PPI today, the US data will drive elevated volatility in the markets.Ferrous metals followed the same direction as base metals yesterday, with iron ore futures in Singapore breaking through the highs seen in late December 2021. The price is now moving toward its 200-day moving average (at circa $135/tonne), which is likely to act as a strong resistance. We believe that a breakthrough is possible only through some structural (fundamentals-driven) change in the market, which is out of sight. We continue to stick to our bearish view on iron ore futures in the medium and long term, though the current rally could continue in the short term. Further restocking ahead of the Lunar New Year (this was partly responsible for the recent surge in prices), risks of unfavorable weather conditions (bad for mining and transportation) and more speculation might fuel futures in the near term. However, the upside for iron ore futures looks limited due to the strong resistance at circa $135/tonne, with fundamentals pointing to a coming cool-off in quotes: inventories at Chinese ports are almost at record highs, booming exports by Australia are offsetting lower Brazilian supply (due to flooding), while the upcoming Olympics, together with China's zero-Covid approach, will limit steel output. Hence, the fundamentals backdrop is changing and we believe fundamentals will soon start prevailing as the driver of the iron ore market instead of speculative