Commodities Daily - January 20, 2022

> Oil prices stabilize ahead of the EIA weekly inventory report. This morning, Brent is still trading around $88/bbl as investors digest a mixed API inventory report that showed an increase in crude oil and gasoline stocks but a decrease in distillates. Also in focus are comments by US President Joe Biden, who pledged to continue trying to lower oil prices, although investors realize that while Biden does have some options to address the increase in oil prices, many of them would be limited and likely short-lived. Today, investors will primarily eye the weekly EIA inventory update, which is also expected to be mixed, providing little further tailwinds to oil prices, although we do not expect it to take Brent out of its current trading range.> Gold boosted by lower Treasury yields and weaker dollar. Gold rose from $1,815/oz to $1,840/oz yesterday, while the US 10y Treasury yield slid from 1.87% to 1.86% and EUR/USD corrected from 1.133 to 1.135. Gold is trading near $1,840/oz as we write. Today's data releases include US existing home sales data for December, ECB monetary policy meeting minutes and weekly US initial jobless claims. We expect bullion to trade in a $1,825-1,840/oz range today.> Base metals rally on macro backdrop, fundamental tightness; iron ore on rise again amid dovish PBoC. Base metals traded higher yesterday as China pledged to provide more support for its economy this year, with demand for raw materials likely to rise. Meanwhile, a weak dollar and backwardation across the board are also positive for quotes.OIL PRICES STABILIZE AHEAD OF THE EIA WEEKLY INVENTORY REPORTYesterday, Brent traded sideways within a $87.6-89.2/bbl range, briefly registering new YTD highs. In its monthly report, the IEA highlighted that oil demand this year is on track to hit pre-pandemic levels and that global stockpiles are falling rapidly amid robust demand and as OPEC+ struggles to revive output. All in all, according to the IEA, the surplus facing world markets this year is shrinking, with the agency slightly upgrading its oil demand estimates from last month. Projections for global oil demand were revised up by 0.2 mln bpd for both 2021 and 2022. The IEA highlighted that the recent surge in Covid-19 cases is having a more muted impact on oil use. Preliminary data for December 2021 show OECD oil and refined products inventories falling by 45.2 mln bbl to 2,711 mln bbl and are now 214 mln bbl below the 2015-19 average and at a seven-year low.Meanwhile, OPEC+ supply growth issues were emphasized, with the group managing only 60% of its planned increase in December and Nigeria, Angola, Malaysia and even Russia all struggling with capacity constraints. As OPEC+ tries to restore its remaining offline output, its spare production capacity (a shock absorber in case of disruptions) could diminish to 3 mln bpd, from about 5 mln bpd currently, the IEA said. That could leave the market vulnerable to price volatility, even as output grows sharply in the U.S., Canada and Brazil. Yesterday, front-month Brent eventually settled at $88.44/bbl, fixing $0.93/bbl above the previous settlement.This morning, Brent is still trading around $88/bbl as investors digest a mixed API inventory report that showed an increase in crude oil (+1.4 mln bbl) and gasoline stocks (+3.46 mln bbl) but a decrease in distillates (-1.18 mln bbl). Also in focus are comments by US President Joe Biden, who pledged to continue trying to lower oil prices, although investors realize that while Biden does have some options to address the increase in oil prices, many of them would be limited and likely short-lived. Today, investors will primarily eye the weekly EIA inventory update, which is also expected to be mixed, providing little further tailwinds to oil prices, although we do not expect it to take Brent out of its current trading LD BOOSTED BY LOWER TREASURY YIELDS AND WEAKER DOLLARGold rose from $1,815/oz to $1,840/oz yesterday, its highest level since November, while the US 10y Treasury yield slid from 1.87% to 1.86%. EUR/USD rose from 1.133 to 1.135 creating tailwinds for bullion. In the US, housing starts and building permits for December were released: both came in above expectations but did not pressure bullion. The positive momentum came on the back of the risks of new lockdowns and an economic slowdown in the US owing to a record Covid daily death rate and more that 1.1 mln new daily cases. The main driver for the gold market yesterday was a speech by US President Joe Biden, who said that the Fed should control the inflation surge and make sure that it ends up being temporary. He also said that it is necessary to recalibrate support and that "inflation has everything to do with the supply chain." Some investors saw in these remarks concern that inflation might be on track to remain elevated, as was seen in the US in the 1970s-80s. As a result, they looked to hedge through gold and amid the lower 10y Treasury yield and slide in the dollar. However, most of the rise in the gold price happened within minutes and came on huge volumes. In light of that fact and in tandem with the Fed's currently hawkish stance, which implies that the pandemic-era stimuluses are going to end, the current positive sentiment in bullion is probably temporary, in our view. Gold is trading near $1,840/oz as we write. Today's data releases include US existing home sales data for December, ECB monetary policy meeting minutes and weekly US initial jobless claims. Gold may try to consolidate near the current levels while markets wait for the FOMC meeting next week where clues could emerge about when the first rate hike may happen (currently expected in March). Some light may also be shed on further monetary policy adjustments. That creates fundamental pressure for gold, which will likely decline from the $1,840/oz level. However, today we expect bullion to trade in a $1,825-1,840/oz SE METALS RALLY ON MACRO BACKDROP, FUNDAMENTAL TIGHTNESS; IRON ORE ON RISE AGAIN AMID DOVISH PBOCBase metals closed with gains yesterday. The 3m LME contract for copper added 1.71% (+$166/tonne from the previous day's close) to $9,842/tonne, aluminum gained 0.86% (+$26/tonne) to $3,051/tonne, nickel surged 4.90% (+$1,081/tonne) to $23,154/tonne and zinc edged higher 0.41% (+$15/tonne) to $3,582/tonne.After the PBoC cut its key rate earlier this week for the first time since the pandemic struck, it said that more monetary easing would be forthcoming in 2022 to support economic growth, which has been slowing down for almost a year now. This dovish approach brightens the outlook for metals demand, and industrial metals rallied during yesterday's trading session. Temporary dollar weakness also spurred quotes higher. Besides the currently supportive macroeconomic backdrop, the backwardation across all base metal markets implies there is still fundamental tightness. The low levels of inventories across the board are acting as a strong support for metal prices. We expect quotes to remain at elevated levels, with some cool-off in sight closer to the end of January, when the next Fed meeting will take place.Chinese pro-stimulus rhetoric has also spurred iron ore quotes this week amid potentially stronger demand for the raw material from steelmakers. While the PBoC monetary easing and the government's fiscal support for construction, infrastructure and real estate will remain positive factors for iron ore this year, we note that steel output cuts are still planned as China focuses on lowering emissions from the steel sector. With this in mind, we believe iron ore quotes are unlikely to continue to rally. The price is currently at its 200-day moving average of $130/tonne, which represents a solid resistance level. We believe prices will push below it soon as we are approaching a period of weaker demand amid the Lunar New Year and upcoming Olympics.