Commodities Daily - July 6, 2021

> Oil prices top $77/bbl as OPEC+ fails to reach an agreement to raise output. This morning, Brent has extended its gains and is trading near $77.5/bbl in what we see as a relatively modest reaction, which suggests investors are nonetheless cautious over the longer-term implications of the OPEC+ decision (or lack of one) - should the UAE leave the deal, producers might ramp up supply. Today, investors will eye eurozone retail sales for May and the US ISM service-sector PMI for June, which are likely to be upbeat, supporting Brent toward $78/bbl. In addition, oil prices should draw support from the reopening of US markets following yesterday's holiday.> Gold was steady before sharp rally this morning. Gold traded near $1,790/oz yesterday, while the 10y Treasury yield was at 1.42%. The Markit June service PMI for the eurozone came in slightly higher than expected. This morning, gold prices have risen sharply above $1,800/oz. Investors will eye June ISM and Markit service PMIs, eurozone ZEW economic sentiment index for July and retail sales for May. Bullion may try to test resistance at $1,810/oz today.OIL PRICES TOP $77/BBL AS OPEC+ FAILS TO REACH AN AGREEMENT TO RAISE OUTPUTYesterday, Brent rose above $77/bbl for the first time since 2018 as OPEC+ failed to reach a compromise with the UAE (the meeting was cancelled before it began), meaning the current production limits will remain in place for August despite the recovering demand. The informal talks over the weekend on extending the current agreement beyond 1Q22 and the UAE demand for a higher production baseline had ended unsuccessfully. This morning, Brent has extended its gains and is trading near $77.5/bbl in what we see as a relatively modest reaction, which suggests investors are nonetheless cautious over the longer-term implications of the OPEC+ decision (or lack of one) - should the UAE leave the deal, producers might ramp up supply.While many in the market may be concerned that yesterday's outcome presages the end of the deal and a production free-for-all, we think that this is not the case, at least for now. The OPEC+ deal has been in place for more than a year now and runs until March 31, 2022, so the automatic fallback is to adhere to the existing deal (unlike in March 2020, when the group failed to extend an expiring deal, which lead to a brief price war), which was yesterday confirmed by Russia and Saudi Arabia. However, with no additional OPEC+ production in August and Iranian oil, in our view, unlikely to return to the market until 4Q21 at the earliest, the physical crude market will come close to overheating, sending Brent calendar spreads into backwardation by more than $1/bbl. The risk in the near term is that the Brent flat price overshoots beyond $80/bbl, although the price upside will be limited by fears of increased cheating on the output cuts and about what the disagreements among the key Gulf Cooperation Council members mean for the future of OPEC cohesion.The plan now is to continue with the OPEC+ monthly meetings, though there is no date set for the next one and there is no requirement to hold them. Consumer countries, particularly the US, may now try to lobby the group to raise output. We expect OPEC+ to try for a meeting later this month or in early August, with a view to increasing production in September, but only if there appears to be a real chance of breaking the current deadlock. If not, production may well be held steady through September as well. Overall, if oil prices spike, then the pressure on OPEC+ will grow, perhaps forcing a deal to increase September output. That said, future OPEC+ discussions will now be colored by the recent events and the uneasy Saudi-UAE relations even if a compromise is reached in the next few weeks.Today, investors will eye eurozone retail sales for May and the US ISM service-sector PMI for June, which are likely to be upbeat, supporting Brent toward $78/bbl. In addition, oil prices should draw support from the reopening of US markets following yesterday's LD WAS STEADY BEFORE SHARP RALLY THIS MORNINGGold traded in a tight range near $1,790/oz yesterday, while the US 10y yield was at 1.42% on a day in which US markets were closed due to Independence Day. EUR/USD hovered near 1.186, thus limiting movements in bullion. The eurozone IHS Markit service PMI for June printed 58.3 points, which is slightly better than the expected 58 and in line with the May value. Also, the eurozone composite PMI came in at 59.5, slightly above the consensus of 59.2. The increasing economic activity in Europe is creating support for gold as the euro strengthens against the dollar, but it failed to move bullion significantly yesterday due to the American market being closed. During the Asian session today, gold rose sharply above resistance at $1,800/oz. It appears that after the mixed labor market results and yesterday's holiday bulls managed to push bullion higher ahead of the FOMC minutes tomorrow. However, we don't expect gold to hold this level if concern about the Fed being prepared to taper its bond-buying program soon is confirmed by the minutes. Today, investors will eye the June IHS Markit and ISM PMI service indexes for the US, July ZEW economic sentiment index and May retail sales for the eurozone. Markets expect a slight decrease in the pace of the US economic recovery, while in the eurozone retail sales are expected to rise. Given this, we think that bullion may try to test new resistance at $1,810 /oz