Commodities Daily - March 11, 2022

> Oil prices came under pressure following US CPI release. Yesterday, after rallying around $8.2/bbl toward $118.4/bbl, Brent began to slide to $109/bbl after US inflation rose to a fresh 40-year high on rising gasoline, food and housing costs. This morning, Brent continues to trade near $109/bbl. The enormous price volatility in recent days and exchanges having to boost margins (effectively raising the cost of buying and selling) has driven open interest in the main oil contracts to a six-year low as traders retreat from risk. Today, investors will eye the weekly Baker Hughes update on active US rig counts and preliminary March University of Michigan consumer sentiment. We think Brent is unlikely to fall much lower than it already did in the last two sessions and will attempt to consolidate near the $110/bbl mark.> Gold nudges higher on rising US inflation. Gold nudged higher from $1,990/oz to $1,995/oz yesterday, while the 10y US Treasury yield rose from 1.95% to 1.99%. It is trading near $1,985/oz as we write. Markets are awaiting the preliminary Michigan consumer sentiment index for March. We expect bullion to trade in a $1,975-1,995/oz corridor today.> Base metals mixed yesterday; thermal coal to remain at elevated levels. Base metals traded mixed yesterday. Nickel was flat amid subdued trading in China and no trading on the LME, while aluminum was able to recoup some of its recent losses with the upside risks still in place. Thermal coal is likely to stay at elevated levels, since Russian coal cannot be pulled out of global trade without any consequences for prices.OIL PRICES CAME UNDER PRESSURE FOLLOWING US CPI RELEASEYesterday, after rallying around $8.2/bbl toward $118.4/bbl, Brent began to slide to $109/bbl after US inflation rose to a fresh 40-year high on rising gasoline, food and housing costs. Investors are becoming concerned that surging prices and stagflation risks could deliver a big hit to the short-term crude demand outlook. The US CPI for February printed 7.9% y-o-y (0.8% m-o-m), following a 7.5% annual gain in January. Also note that "demand destruction" is an often used but typically misunderstood phrase. In fact, there has never been a price-induced outright contraction in demand -- not in the 1970s, not in 2008, and certainly not in the last few years. In 2008, prices reached $147/bbl, and subsequently plummeted. But we would argue that had it not been for the financial crisis, oil prices would have had to go higher for demand to have suffered. Thus, the exact price level that would damage demand remains unknown. What we do know is that it is not $120/bbl Brent, and probably not $150/bbl either, especially in the post-pandemic recovery world. The market will still have to discover the price of real demand destruction. Yesterday, front-month Brent eventually settled at $109.33/bbl, fixing $1.81/bbl below the previous settlement.This morning, Brent continues to trade near $109/bbl. The enormous price volatility in recent days and exchanges having to boost margins (effectively raising the cost of buying and selling) has driven open interest in the main oil contracts to a six-year low as traders retreat from risk. Today, investors will eye the weekly Baker Hughes update on active US rig counts and preliminary March University of Michigan consumer sentiment. We think Brent is unlikely to fall much lower than it already did in the last two sessions and will attempt to consolidate near the $110/bbl LD NUDGES HIGHER ON RISING US INFLATIONGold nudged higher from $1,990/oz to $1,995/oz yesterday, while the 10y US Treasury yield rose from 1.95% to 1.99%. Meanwhile, EUR/USD slid from 1.107 to 1.099. Geopolitical tensions receded into the background and fundamental factors prevailed, which created some support for bullion. US CPI inflation was reported at 7.9% y-o-y and 0.8% m-o-m, in line with expectations but also the highest readings in 40 years. This added to worries that the elevated inflation may become persistent and rise even higher. The Fed is likely to take steps to curb inflation, though the peak may not have yet passed - rising commodity prices look set to continue pushing inflation higher and also slowing economic growth. Yesterday, the ECB took a hawkish step to curb inflation by winding down its bond-buying program early and guiding for a rate liftoff "sometime after" the end of the program. During Asian trading today, gold was quoted near $1,985/oz. Markets are awaiting the preliminary University of Michigan consumer sentiment index for March. The conflict in Ukraine and rising geopolitical risks remain the key risk for the global economy and inflation, but a slowing news flow has somewhat calmed investors' concerns and led to some of the risk premium in gold being priced out, meaning gold is starting to pay more attention to fundamental factors. The consensus for the Michigan consumer sentiment index is 61.0 points after 62.8 in February - such a print could provide some support for gold. We expect bullion to trade in a $1,975-1,995/oz corridor SE METALS MIXED YESTERDAY; THERMAL COAL TO REMAIN AT ELEVATED LEVELSBase metals closed mixed yesterday. The 3m LME contract for copper rose 1.15% (+$115/tonne from the previous day's close) to settle at $10,117/tonne and aluminum climbed 2.59% ($87/tonne) to $3,428/tonne, while nickel finished flat at $48,033/tonne and zinc slipped 1.95% (-$77/tonne) to $3,863/tonne.Trading in the nickel market remained muted yesterday, as Chinese traders were waiting for things to settle down after the rollercoaster ride earlier in the week. There was not any trading on the LME, and trading on the exchange will remain halted today. When nickel trading in London resumes (presumably next week), volatility is likely to be very high, but the daily price moves will be capped at 10%. Meanwhile, aluminum is on the rise again, as there are a number of risks that may yet materialize (perhaps in full), including new sanctions, an exacerbation in the energy crisis, and disruptions in the supply of primary aluminum from Russia to foreign markets and from Rusal subsidiaries to Russia (of raw materials). We therefore still see significant upside for aluminum.Meanwhile, thermal coal remains in the epicenter of the geopolitical crisis as Europe looks to curb its reliance on Russian coal. We expect the Newcastle FOB Australia coal price to remain at elevated levels, as Europe is likely to take in massive volumes of coal from the Asia Pacific region to mitigate the disruption in supply from Russia. However, with Australia currently suffering from lower coal output amid unfavorable weather conditions and Indonesia banning exports for miners not meeting their domestic market obligation (local miners must sell at least 25% of their coal domestically at a capped price), the already-tight Asian market is unlikely to be able to fully replace Russian coal exports to Europe (circa 50% of European coal comes from Russia). While there is evidence that Europe is already taking in more coal from Colombia, South Africa and the US, we cannot ignore the fact that Russia accounts for 11% of global coal production (excluding China and India, which are net importers and absorb their domestic production in full), which means redirecting the ex-Russia trade flows will inevitably involve significant price adjustments. We therefore expect coal prices to remain near the current elevated levels or perhaps move even higher as long as Russian coal does not leave the