Commodities Daily - January 26, 2022

> Oil prices rose yesterday and are now consolidating ahead of the EIA inventory report and Fed meeting results. Today, investors will eye the weekly EIA inventory report, which we think is likely to be less upbeat than the API report released overnight. The outcome of the Fed meeting could provide additional headwinds, potentially pushing Brent back toward $86/bbl.> Gold moderately higher ahead of the Fed decision. Gold rose from $1,840/oz to $1,845/oz yesterday, while the US 10y Treasury yield continued to trade sideways near 1.77%. Gold is trading near $1,845/oz as we write. Today, the market awaits the FOMC decision and Jerome Powell's press conference, US wholesale inventories and new home sales, both for December. We expect bullion to test support at $1,825/oz today.> Base metals mixed ahead of Fed decision; aluminum and thermal coal rising. Base metals traded mixed yesterday ahead of the Fed decision today. Aluminum bounced back on fears of a supply disruption from Russia amid elevated geopolitical tensions. Thermal coal, meanwhile, continues to gain, with the Indonesian government's upcoming decision on its export ban in focus as the end of the month approaches.OIL PRICES ROSE YESTERDAY AND ARE NOW CONSOLIDATING AHEAD OF THE EIA INVENTORY REPORT AND FED MEETING RESULTSYesterday, Brent rallied almost $2/bbl toward $88.4/bbl on signs the US consumer remains quite confident despite the sharp rise in prices for most goods in 2021 (though the rise in prices for cars and motor fuels also supports the strong oil demand narrative for this year). While the consumer confidence index declined m-o-m in January, as persisting inflation and the Omicron variant have dented the optimism of American consumers, the decline was less steep than expected, indicating that consumers are not panicking about high prices just yet. Front-month Brent eventually settled at $88.2/bbl, fixing $1.93/bbl above the previous settlement.Another important highlight yesterday was the Urals crude loading program from Russia's Baltic ports for February, which Bloomberg reported is set to fall to 5 mln tonnes (1.31 mln bpd, a five-month low) from 6.1 mln tonnes in January (1.44 mln bpd). Although loading from the Black Sea port of Novorossiysk will be slightly higher (1.1 mln tonnes in February versus 1.03 mln tonnes in January), the overall decline underscores the challenges the country faces bringing supply to the global market at a time when there is a fair amount of optimism over a demand recovery. However, it is hard to say what the drop in exports means for the nation's oil production (which should be rising given the terms of the OPEC+ deal), as Russian refineries appear to be running hard and could be soaking up barrels that would otherwise be exported.This morning, Brent is trading near $88/bbl as investors digest last night's API inventory report, which showed a slight decrease in US stockpiles of crude oil (-0.875 mln bbl) and distillates (-2.2 mln bbl), along with another weekly build in gasoline stocks (+2.4 mln bbl). This evening, investors will eye the weekly EIA inventory report, which we think is likely to be less upbeat than the API report. However, the FOMC meeting results will be the main factor in play today. If the Fed is more hawkish than expected, Brent could be pressured back toward $86/bbl. The Fed has already turned much more hawkish this year and now appears to be signaling more than three hikes this year (i.e. more than it was expecting back in December). It also appears likely to start allowing the balance sheet to run off in 2H22. We would not rule out the Fed delivering a hawkish surprise, signaling more than four 25 bp hikes this year and a rapid balance sheet reduction. This would boost the greenback and Treasury yields and could push the euro down close to EUR/USD 1.11 this week, which would weigh on LD MODERATELY HIGHER AHEAD OF THE FED DECISIONYesterday, gold rose from $1,840/oz to slightly above $1,845/oz, a two-month high, while the US 10y Treasury yield continued to trade sideways near 1.77%. Meanwhile, EUR/USD corrected from 1.131 to 1.130. Bullion found slight support from the slide in US equities and another portion of weak macro data from the US. The January Conference Board consumer confidence reading plunged after a three-month rally, reflecting inflation pressure and pandemic concerns. Also, the Richmond Fed's manufacturing index's January reading was only half of what it was in December. The macro statistics continued to signal an uneven pace of the recovery in the world's largest economy, thus providing tailwinds for bullion. Additionally, concerns about the situation in Ukraine also somewhat increased interest in bullion. The IMF published a new version of the World Economic Outlook with less upbeat forecasts: the US economy is now expected to grow 4% in 2022 (-1.2 pp from the last update), while consumer prices in advanced economies are expected to increase 3.6% (+1.6 pp). All of that helped gold prices climb higher despite the looming FOMC meeting, which will likely be negative for gold. During Asian trading today, gold is near the $1,845/oz level. Today, markets await the FOMC decision and Jerome Powell's subsequent press conference, US wholesale inventories and new home sales, both for December. The Fed will likely clearly indicate that the first rate hike this year will take place in March and may also offer a clue about when it will start reducing its balance sheet. It could even signal that more than 100 bps worth of hikes are in the cards this year. Expectations of a hawkish FOMC meeting may prevent gold from rising today, as aggressive policy signals would probably push the dollar and 10y Treasury yields higher, thus raising the opportunity costs for gold investors. We therefore expect bullion to test support at $1,825/oz SE METALS MIXED AHEAD OF FED DECISION; ALUMINUM AND THERMAL COAL RISINGBase metals closed mixed yesterday. The 3m LME contract for copper was up 0.75% (+$73/tonne from the previous day's close) at $9,801/tonne and aluminum added 2.10% (+$63/tonne) to $3,092/tonne, while nickel dropped 0.29% (-$64/tonne) to $22,340/tonne and zinc ended lower by 0.64% (-$23/tonne) at $3,573/tonne.Base metals showed relatively modest dynamics yesterday compared to the plunge on Monday. Aluminum was an exception, rebounding after the correction. Prices are now back near the all-time high of $3,172/tonne seen in October. Such a move comes as investors are concerned over potential aluminum supply disruptions in Russia. The fears are based on the current geopolitical tensions over Ukraine and potential sanctions on Russia in the event of an escalation. Aluminum has already rallied about 20% since mid-December, when China announced it would ease monetary policy and European smelters shut down capacity due to the region's energy crunch. Much will depend now on the Fed decision, though we believe upside to test the October high remains in place.The situation in the thermal coal market, meanwhile, remains intact, with Newcastle and API2 prices still on the rise and the premium between the two remaining. The seaborne market remains tight as Indonesia has not fully lifted its export ban yet and other exporting countries are incapable of satisfying the seaborne demand. China is currently accepting some volumes of Australian coal that had been sitting off the Chinese shore. In addition, we believe that Covid restrictions and unfavorable weather are also affecting the thermal coal supply, with mining subdued and transportation and customs issues prolonging delivery. The end of January marks the time when the Indonesian government will either prolong its export ban or lift it in full. We think it will decide on the latter since Indonesian plants have significantly increased their coal stocks and since a large group of coal miners have already been allowed to export. Should the ban actually be lifted in full, thermal coal quotes will retreat, in our view; a prolongation of the ban would, on the contrary, likely push Newcastle to its early October high of $250/