Commodities Daily - January 18, 2022

> Oil price rally gets boost from deadly drone strikes on UAE. Today, investors will eye OPEC's monthly oil market report and the EIA's monthly drilling productivity report. The latter will provide forecasts for US shale production in February. We see potential for Brent to rally further in the wake of the drone strikes on the UAE and move above $88/bbl later in the day as US traders return to action after yesterday's holiday.> Gold almost unchanged due to limited market activity. Gold rose from $1,815/oz to $1,820/oz yesterday, while the US 10y Treasury yield stayed near 1.79%. Gold is trading back near $1,815/oz as we write. Today's data releases include the ZEW economic sentiment index, the Empire State manufacturing index and the NAHB housing market index, all for January. We expect bullion to trade in a $1,810-1,825/oz range today.> Base metals mixed after Chinese data; iron ore retreating. Base metals traded mixed yesterday as investors weighed Chinese data, which also turned out mixed. We are likely to see quotes come down in the weeks to come as Chinese demand is likely to be sluggish during the upcoming holidays. Meanwhile, iron ore is in retreat with fundamentals starting to prevail over sentiment.OIL PRICE RALLY GETS BOOST FROM DEADLY DRONE STRIKES ON UAEYesterday, after sliding almost $1.2/bbl early on, Brent began to generate positive momentum and rose back toward $86.7/bbl as the market's attention turned to headlines indicating that drone strikes had been carried out in the UAE, OPEC's third biggest oil producer. Yemen's Houthi militia has claimed responsibility for the attacks, which resulted in an explosion and caused a fire to break out at Abu Dhabi's main airport. The strikes took place just days after the Houthi fighters warned Abu Dhabi against intensifying its air campaign against them, with one Houthi leader threatening that the group would respond by carrying out more attacks on the UAE. These latest developments could bring a halt to the diplomatic efforts to ease frictions within the region and complicate the separate talks to restore the 2015 nuclear deal between Iran and global powers given Iran's longtime support of the Houthis. The Persian Gulf has seen a series of attacks on shipping and oil facilities since the US withdrew from the nuclear deal with Iran in 2018. Washington has blamed these attacks on Iranian-backed militias, including the Houthis in Yemen, where a Saudi-led military coalition including the UAE has been battling the group since 2015.Since early December, when Brent dipped to as low as $65.7/bbl on Omicron fears, oil prices have started to rapidly recover toward fundamentally justified levels, as the fears have started to gradually abate. The brisk pace of the rebound in oil prices back to late-October levels was made possible by unexpected supply disruptions in Libya, Kazakhstan and Nigeria, as well as a deep freeze that disrupted oil flows in Canada and the northern US. Although much of this lost supply has returned, prices have so far been able to brush off the supply recovery amid near-record-low stockpile levels, dwindling spare capacity and a brightening demand outlook. And now, on top of the aforementioned disruptions, there is a growing risk of escalation in the Gulf. In the past, military attacks in the oil-rich region have resulted in strong upswings in oil prices. Moreover, while many market participants had been worried that the Fed could trigger a global market correction by raising interest rates too quickly, Fed Chairman Jerome Powell's comments last week seem to have assuaged these fears for now. The market seems to be comfortable with a more front-loaded hiking cycle, which, if successful, could slow inflation without derailing growth in 2023. This morning, Brent rallied to $87.55/bbl, its highest level since 2014. The benchmark continued to draw support from what was one of the biggest attacks to date on OPEC's third largest oil producer. Today, investors will eye OPEC's monthly oil market report and the EIA's monthly drilling productivity report. The latter will provide forecasts for US shale production in February. We see potential for Brent to rally further in the wake of the drone strikes on the UAE and move above $88/bbl later in the day as US traders return to action after yesterday's LD ALMOST UNCHANGED DUE TO LIMITED MARKET ACTIVITYGold rose from $1,815/oz to $1,820/oz yesterday, while the US 10y Treasury yield remained near 1.79%. EUR/USD also held steady at 1.141. The US market was closed due to the Martin Luther King holiday, limiting activity for the metal and giving investors some time to evaluate the situation around bullion. Record inflation figures and moderately hawkish Fed rhetoric have recently supported bullion, but the likely timing of the rate lift-off in March is still the main risk facing gold, as it is set to bring higher yields and a stronger dollar. The market is pricing in a first rate hike in March and four hikes during 2022, but the FOMC meeting on January 25-26 could provide a clearer timetable for investors. Omicron appears unlikely to warrant more lockdowns in many developed markets due to low hospitalization rates, but China retains zero tolerance for Covid and is still applying new lockdowns, which could provide another round of supply-chain turbulence and keep inflation elevated for longer than projected. This risk could push the Fed to act more aggressively on monetary policy and prevent prices from rising further. This also presents a risk for a further decline in bullion.Gold is back trading near $1,815/oz as we write, while the US 10y Treasury yield has climbed to 1.84%. Today's data releases include the ZEW economic sentiment index, the Empire State manufacturing index and the NAHB housing market index, all for January. The consensus forecasts mostly envisage a slowing recovery, which is unlikely to provide much support for gold, in our view. We expect bullion to trade in a $1,810-1,825/oz range SE METALS MIXED AFTER CHINESE DATA; IRON ORE RETREATINGBase metals closed mixed yesterday. The 3m LME contract for copper added 0.12% (+$11/tonne from the previous day's close) to $9,731/tonne and aluminum gained 0.69% (+$20/tonne) to $2,997/tonne, while nickel was down 0.59% (-$131/tonne) at $22,063/tonne and zinc fell 0.37% (-$13/tonne) to $3,508/tonne.Base metals demonstrated mixed dynamics as investors weighed mixed Chinese data and the PBoC decision to lower the interest rate on loans to financial institutions, as well as the reserve requirement rate. However, a rising dollar in the past few days has restrained prices from going higher. Meanwhile, we are coming closer to the Chinese New Year, and the restocking that has been pushing quotes higher in recent weeks is likely to fade, with base metals expected to see lower trading volumes. Investors are awaiting data on Chinese base metals output later this week, which might add some volatility to the markets.Yesterday, iron ore futures slid for the third day in a row, settling at $123/tonne in Singapore after it had touched its strong resistance at the 200-day moving average. The recent slide has come on the back of Chinese economic data, which has showed the Chinese economy slowing in the previous quarter. Yesterday, data on steel output that showed that Chinese steel production in 2021 fell in y-o-y terms (despite a strong rebound in December), which put additional pressure on quotes. We expect iron ore futures to continue their retreat, as the period of restocking is coming to an end and curbs on steel output during the Olympics are likely to put a lid on iron ore demand. On the supply side, there is evidence that rains in Brazil will ease, which would allow Vale SA and other local producers to increase output in the weeks to come. These factors might push iron ore stockpiles upward, toward the record levels seen in 2018, meaning downside for iron ore