Commodities Daily - January 19, 2021

> Oil prices hold steady ahead of the monthly IEA report. Today, oil investors will eye the EIA drilling productivity report and, more importantly, the IEA's monthly oil market report to see whether the agency lowered its estimate for oil demand next year following the downward revision by the EIA and a slight upward revision by OPEC. Also of importance will be the scale of the upward revision to this year's US oil production estimate. In our view, the price risks today are skewed to the downside, especially given the further tightening of lockdown measures amid signs that the resurgence of the coronavirus in Asia is starting to impact demand. In our view, today Brent is likely to break below the $54.4-54.6/bbl support area, consolidating above the $53.9/bbl support level. Also note that resistance remains at $55.2/bbl, with a break above potentially leading to a gain into the $55.6-56.2/bbl range, although we think that this is unlikely this week.> Gold stabilizes as dollar rally takes a breather. The main highlights of the day will be results of a confidence vote in the Italian government and a US Senate vote on Biden's candidate for Treasury secretary, former Fed Chair Janet Yellen. She is expected to be confirmed without any problems. Yellen will testify to the Senate at 18:00 Moscow time and is expected to call for expansive stimulus (especially fiscal) to combat the economic impact of Covid-19. We think the risks for gold lie to the upside today, and we expect it to consolidate within a $1,839-1,861/oz range.OIL PRICES HOLD STEADY AHEAD OF THE MONTHLY IEA REPORTYesterday, front-month Brent was trading sideways within a $54.5-55.2/bbl range, stabilizing after an almost $3/bbl correction last week from as high as $57.4/bbl. It eventually settled at $54.75/bbl, fixing $0.35/bbl below the previous settlement. Demand concerns amid the resurgence of the coronavirus (especially in Asia) remain the key fundamental factor weighing on oil prices at the moment. More and more regions around the world are being put under strict lockdowns, although this is not necessarily reflected in the current front-month Brent contract, which is still holding at around $55/bbl. One gauge that reflects the fundamental concerns is the recent flattening of the front end of the Brent futures curve from a backwardated state seen at the start of the year. Physical market oil grades are not rallying either (Bloomberg now reports that premiums for Russia's ESPO crude, a favorite of Asian refiners, are down by more than $1/bbl from last month) partially because the market is still absorbing inventory released since November, when crude curves moved into backwardation. We think there is still potential (albeit limited) downside to Brent's time spreads amid a likely slowdown in Indian and Chinese demand. In those countries, gasoline demand already returned to pre-Covid-19 levels (Chinese diesel demand hit a record high in 2020 amid a booming manufacturing sector). From here the market could correct a touch lower, with front-month Brent potentially testing the $53/bbl mark, but it is important to note that very few are willing to short this market given the upbeat 2H21 market outlook when demand is expected to strongly exceed supply. Certainly working from home will remain more prevalent in the West even after lockdowns end and business air travel will be hamstrung as companies have embraced virtual meetings. But rising populations and income levels in the East, and the shift in global manufacturing to Asia, will translate into higher global oil demand.Today, oil investors will eye the EIA drilling productivity report and, more importantly, the IEA's monthly oil market report to see whether the agency lowered its estimate for oil demand next year following the downward revision by the EIA and a slight upward revision by OPEC. Also of importance will be the scale of the upward revision to this year's US oil production estimate. Note that earlier last week, oil investors were digesting comments from IEA Director Fatih Birol that at current prices many shale producers will be able to increase production this year and next. He also said that in the short term, shale oil from the US will be needed to fill the gap in the oil supply/demand balance. Regarding the EIA drilling productivity report, note that last month the EIA expected US tight oil output to drop 0.136 mln bpd m-o-m to 7.44 mln bpd in January, with most of the seven major shale formations seeing declines in January despite the higher oil prices and rise in the US active oil rig count in 4Q20.In our view, the price risks today are skewed to the downside, especially given the further tightening of lockdown measures amid signs that the resurgence of the coronavirus in Asia is starting to impact demand. In our view, today Brent is likely to break below the $54.4-54.6/bbl support area, consolidating above the $53.9/bbl support level. Also note that resistance remains at $55.2/bbl, with a break above potentially leading to a gain into the $55.6-56.2/bbl range, although we think that this is unlikely this week.GOLD STABILIZES AS DOLLAR RALLY TAKES A BREATHERGold slid almost $20/oz to $1,810/oz early yesterday before paring back those losses and stabilizing within a $1,830-1,840/oz range for the rest of the day. This was primarily due to the dollar stabilizing following last week's gains. Expectations that Janet Yellen will tonight call for the US Congress to launch more expansive fiscal stimulus have helped markets, while some financial commentators have cited a delayed reaction to yesterday's strong Chinese GDP report for a rally in Asian equities. The mood in global markets has improved further this morning. A vote of confidence in the Italian government was held in the lower house of the parliament yesterday after the ruling coalition collapsed, with the government securing enough support. This has boosted the euro to 1.21 as we write, which is in turn is supporting gold.Another vote will take place in the Italian Senate (the upper house) today and is expected to be more difficult. If a vote of no confidence is passed, early parliamentary elections are likely to take place, where euroskeptics could find more support, which would weigh on the euro and thus gold. Another highlight today will be a US Senate vote on Biden's candidate for Treasury secretary, former Fed Chair Janet Yellen. She is expected to be confirmed without any problems. Yellen will also testify to the Senate at 18:00 Moscow time and is expected to call for expansive stimulus (especially fiscal) to combat the economic impact of Covid-19. The final executive orders from outgoing US President Donald Trump could generate volatile political headlines. On the macro front, the major highlight will be the ZEW economic sentiment surveys for the eurozone in January. The PBoC rate decision will be reported overnight. As we write, gold is struggling to hold above the $1,839/oz resistance level, which it failed to do yesterday. Breaking this level would pave the way to next resistance at $1,862/oz. We think the risks for gold lie to the upside today, and we expect it to consolidate within a $1,839-1,861/oz range.