Commodities Daily - March 10, 2022

> Oil slumps despite upbeat EIA inventory report as UAE calls on OPEC+ to boost oil output faster. Yesterday, after trading near $131/bbl, Brent began to plunge, sinking to as low as $105.6/bbl, despite a bullish EIA weekly inventory report and as the UAE called on OPEC+ to boost oil output faster and Ukrainian President Volodymyr Zelensky reiterated his willingness to consider some compromises with Russia. This morning, Brent is slowly paring back yesterday's losses, trading near $115/bbl, as the UAE's energy minister appeared to have tempered an earlier message by the country's ambassador to the US over faster OPEC+ production increases. Iraq has also spoken up against ramping up production more than planned. Today, investors will primarily eye the ECB policy decision and US February CPI data. We think Brent will most likely continue to pare back yesterday's losses, possibly rising to $120/bbl amid diminishing hopes of faster than planned supply increases from OPEC+.> Gold falls from recent highs as Treasury yields rise. Gold fell from $2,050/oz to $1,990/oz yesterday, while the 10y US Treasury yield rose from 1.84% to 1.95%. Bullion is trading near $1,980/oz as we write this morning. Markets are awaiting a US CPI reading for February and the ECB rate decision and press conference. We expect gold to test support at $1,970/oz today.> Base metals and iron ore retrace from recent peaks; geopolitics still in focus. Base metals traded lower yesterday, with nickel plunging the most. The Chinese nickel producer that had found itself in the epicenter of a market squeeze said that it had obtained a sufficient amount of the metal to cover its short positions. Meanwhile, iron ore has been sliding from its recent highs, as Chinese fundamentals indicate there is enough of the material for the time being.OIL SLUMPS DESPITE UPBEAT EIA INVENTORY REPORT AS UAE CALLS ON OPEC+ TO BOOST OIL OUTPUT FASTERYesterday, after trading near $131/bbl, Brent began to plunge, sinking to as low as $105.6/bbl, despite a bullish EIA weekly inventory report and as the UAE called on OPEC+ to boost oil output faster and Ukrainian President Volodymyr Zelensky reiterated his willingness to consider some compromises with Russia. The UAE's ambassador to Washington said in a statement on Wednesday, which was first reported by the Financial Times, that "we favor production increases and will be encouraging OPEC to consider higher production levels." We note that the three countries with the largest spare capacity within OPEC, excluding Iran are UAE (currently has around 1.2 mln bpd of spare capacity), Saudi Arabia (around 1.4 mln bpd) and Iraq (around 0.5 mln bpd). This spare supply is being unwound and introduced to the market very gradually under the OPEC+ deal. The UEA's position could make for a very challenging next OPEC+ meeting, which is scheduled for March 31.Meanwhile, the weekly EIA inventory report was very bullish, with total petroleum stockpiles (this includes oil and refined products) dropping to the lowest in seven years amid decreases in crude oil (-1.86 mln bbl), gasoline (-1.4 mln bbl) and distillates stocks (-5.23 mln bbl). Despite surging prices, any increase in crude oil production has yet to materialize in the weekly data. Output held steady at 11.6 mln bpd. Crude inventories at Cushing dipped yet again (to 22.2 mln bbl), marking a ninth straight week of declines. If the declines start to pick up pace again, inventories will be dangerously low, near levels considered to be operational lows (around 20 mln bbl). Meanwhile, Russian crude imports recovered after sinking to zero the week prior, and now are the highest since December. But these volumes are set to be reduced to zero by April 22 (the end of the wind-down period the Biden administration has given to US buyers of Russian oil). Gasoline demand rose slightly w-o-w, indicating that record high pump prices have yet to deter drivers. The EIA considers fuel to be consumed once it moves to the retail location, so this higher consumption could reflect stockpiling efforts by retailers. Distillate inventories, which is the category most directly affected by the recent ban on Russian petroleum imports, fell to its lowest level since 2014, and the drop was the biggest in about a year. That means higher costs for interstate trucking and for heating fuel, as well as larger fuel bills for farmers. Yesterday, front-month Brent eventually settled at $111.14/bbl, fixing $16.84/bbl below the previous settlement.This morning, Brent is slowly paring back yesterday's losses and is trading near $115/bbl, as the UAE energy minister has contradicted an earlier message by the country's ambassador to the US, saying that "the UAE believes in the value OPEC+ brings to the oil market" and "remains committed to the OPEC+ agreement and its existing monthly production adjustment mechanism." Similarly, the Iraqi oil minister said from an oil conference in Houston that the country hasn't seen extra demand from oil customers and there's no need for OPEC+ to ramp up production more than planned, and that additional hikes could harm the market. Today, investors will primarily eye the ECB policy decision and US February CPI data. We think Brent will most likely continue to pare back yesterday's losses, possibly rising to $120/bbl amid diminishing hopes of faster than planned supply increases from LD FALLS FROM RECENT HIGHS AS TREASURY YIELDS RISEGold fell from $2,050/oz to $1,990/oz yesterday, while the 10y US Treasury yield rose from 1.84% to 1.95%. Meanwhile, EUR/USD climbed from 1.092 to 1.107. Geopolitical risks took a small step back as Ukraine and Russia showed a willingness to continue negotiations. This took off some of the risk premium that had been priced in to gold recently. Meanwhile, the improvement in sentiment helped the S&P 500 to gain more than 2.5% on the day. US JOLTS job openings for January came in at more than 11.2 mln (consensus was 10.95 mln), which seemed to confirm other recent, upbeat data on the US labor market. Yesterday's data is some of the last before the Fed decision next week.During trading in Asia today, gold traded near $1,980/oz. Markets are awaiting a US CPI reading for February and the ECB rate decision and press conference, as well as US weekly initial jobless claims. For the US CPI, the consensus suggests a 0.8% m-o-m increase and 7.9% y-o-y. Such readings would likely create significant pressure for bullion, as they would support expectations for a more hawkish rate-hike cycle and projections from the Fed. Still, geopolitical tensions, which have sent commodities soaring recently and are creating risks for global growth, should provide support for gold. Finally, support for bullion from the ECB decision is unlikely, as it will reflect the rising risks for the European economy. We expect bullion to test support at $1,970/oz SE METALS AND IRON ORE RETRACE FROM RECENT PEAKS; GEOPOLITICS STILL IN FOCUSBase metals closed in the red yesterday. The 3m LME contract for copper was down 2.03% (-$207/tonne from the previous day's close) at $10,002/tonne, while aluminum fell 4.49% (-$157/tonne) to $3,341/tonne, nickel plunged 40.72% (-$33,003/tonne) to settle at $48,048/tonne and zinc dropped 4.73% (-$196/tonne) to $3,940/tonne.The rally in base metals reversed yesterday, with most of the metals retracing from historical highs reached not long ago. Meanwhile, the world's largest nickel producer, Tsingshan Holding Group Co, which was at the heart of the unprecedented short squeeze that drove nickel toward $100,000/tonne on Tuesday, said that it had sufficient inventories for delivery. The company managed to swap its nickel matte for domestic nickel plate, which will allow it to close its short position against the metal. Nickel trading on the LME is still suspended, but we are likely to see a sharp price reaction once trading resumes. The squeeze in the nickel market serves as a good example of what might happen in other markets when deficits become extreme. We think it is possible that we could see a very similar situation emerge in the base metals universe in the near future.Meanwhile, iron ore has been retracing from its local peak of $161/tonne. Iron ore prices had been finding support from developments in the geopolitical arena and expectations that demand from Chinese steelmakers would pick up after the Olympics ended and restrictions on steel mills eased. However, data from the China Iron and Steel Association showed that China's total crude steel production amounted to 2.56 mt per day in February, which is down 2.8% m-o-m and 13.6% y-o-y. Hence, it appears that the likely positive effect on demand for iron ore from China's stimulus measures was offset by an improvement in supply amid a seasonal ease in constraints. Although Chinese manufacturing has always been the key driver for iron ore prices, we believe that in the near term investors will remain focused on geopolitical developments and how they affect trade flows for pig iron and