Commodities Daily - July 2, 2021

> Oil rises then eases amid extension to OPEC+ talks. We expect a deal, possibly involving slightly more than the initially proposed gradual production hike of 2 mln bpd by December 2021, but we think this would be insufficient to meet rising demand in 2H21. Brent is trading near $75.5/bbl as we write. We think it is likely to stabilize around $76/bbl today amid OPEC+ wrangling and draw some support from upbeat US nonfarm payrolls data for June. Following the deal announcement, we still think Brent will remain on track to reach $80/bbl this summer.> Gold steady ahead of US jobs report. Gold traded in a tight range of $1,770-1,780/oz yesterday, consolidating near $1,775/oz, as the US 10y Treasury yield held near 1.47% and US economic data was mixed. Bullion is hovering near $1,775/oz as we write. The US jobs report for June is the focus today, as well as US factory orders for May and a eurozone PPI reading for May. We see gold testing support at $1,745/oz today amid a strong US jobs report.OIL RISES THEN EASES AMID EXTENSION TO OPEC+ TALKSBrent rallied almost $2.2/bbl to $76.7/bbl yesterday after producers signaled a tentative agreement to increase supplies only gradually through the end of the year, a move regarded as insufficient to meet rising demand. Initially, Saudi Arabia and Russia managed to reach a compromise to raise production by 2 mln bpd in total and in 0.4 mln bpd monthly increments between August and December while also extending the current deal beyond end-March through to end-2022. However, later in the day the deal met with strong opposition from the UAE, which is against extending the OPEC+ agreement. It said it would only agree to extending the deal if it receives a higher production baseline level for its production cuts (3.84 mln bpd versus its existing 3.17 mln bpd level). The UAE and several other members have raised similar objections previously, only to be firmly rebuffed due to the risk that this would encourage other countries to make similar demands. Saudi Arabia and the UAE enjoy close ties, and this disagreement will strain but not break them. Brent slid later in the day amid the OPEC+ wrangling and is currently trading near $75.5/bbl. The production baseline issue was a major cause to the delays in the marathon four-day meeting that forged the current OPEC+ agreement in April 2020. If OPEC+ fails to agree anything, the automatic fallback (at least until the next ministerial meeting) will entail the continuation of current quotas, meaning that production will remain static in August at July levels. This outcome could lead to sharply higher oil prices, something most OPEC+ members want to avoid, and it would fail to deliver the desires of both Saudi Arabia (extending the deal) and Russia (quota increases to calm prices), so both will want to find a compromise. We therefore see little risk of a repeat of March 2020, when the previous OPEC+ deal collapsed and producers boosted output. This means the talks could be extended through the weekend, as a compromise will likely depend on complex and difficult-to-anticipate OPEC+ production quota mathematics. On balance, we still believe a deal is likely, but it may indeed take longer than a day to negotiate, as neither side is likely to back down enough to get a quick and clean deal today. Given our expectation of a deal, possibly for more than the initially agreed gradual hike of 2 mln bpd production by December, we still think this would be insufficient to meet rising demand in 2H21. The Brent and WTI futures curves support this view, as calendar spreads have moved deeper into backwardation, a sign of tight supply. For example, WTI for September delivery yesterday closed at a $1.27/bbl premium to the October contract, the highest in about three years. The sharp gains at the front end of the futures curves for Brent and WTI are a sign that traders are banking on extreme market tightness in the coming weeks. We think Brent is likely to stabilize around $76/bbl today amid the OPEC+ wrangling and draw some support from upbeat US nonfarm payrolls data for June. Following the deal announcement, we still think Brent will remain on track to reach $80/bbl this LD STEADY AHEAD OF US JOBS REPORTGold traded in a tight range of $1,770-1,780/oz yesterday, consolidating near $1,775/oz, as the US 10y Treasury yield held near 1.47% and EUR/USD hovered near 1.184. The US initial jobless claims data published yesterday was upbeat, with 364k claims last week versus 388k expected. This created headwinds for gold prices. Meanwhile, the ISM US manufacturing PMI slipped in June to a still-high 60.6 points from 61.2 in May, though those surveyed reported "wide-scale shortages of critical basic materials" and indicated difficulties with meeting increasing levels of demand and filling open positions. This data supported gold yesterday but failed to move it significantly. In addition, the Markit manufacturing PMI for the US also showed a slight downtick in June to 62.1 points, 0.5 lower than in May. Meanwhile, the eurozone manufacturing PMI hit a record 63.4.Bullion is hovering near $1,775/oz as we write. The US jobs report for June is the focus today, with consensus NFP additions at 700k. If the numbers end up in line with or above expectations, gold seems set to fall, as investor concerns about upcoming monetary policy tightening will grow. Today will also see US factory orders for May and eurozone PPI reading for May. We see gold testing support at $1,745/oz today amid a strong US jobs