Commodities Daily - March 12, 2021

> Oil climbs on weaker dollar, surging stock markets amid mixed OPEC report. This morning, Brent has inched lower and is trading near $69.5/bbl as the dollar has begun to rebound. Today, investors will eye eurozone January industrial production, the US February PPI, the preliminary Michigan consumer sentiment index for March and a Baker Hughes rig count update. In our view, if the US PPI data turns out upbeat, as expected, UST yields would rise, which would pour water on the ongoing risk rally. Against this backdrop, we would expect Brent to remain capped below yesterday's high of $69.8/bbl throughout the day or even to slide below the $69.3/bbl support.> Gold prices eased amid upbeat US jobless claims data and firmer US yields; US PPI eyed. This morning, gold has dipped below $1,720/oz as the dollar has started to pare back yesterday's losses ahead of inflation data for Germany and Spain. Later today, US February PPI data and Preliminary University of Michigan consumer sentiment for March will be the main drivers for gold. Inflation remains a key focus for markets, and we think that today's US PPI print will beat consensus estimates, which will push UST yields higher and in turn pressure gold below support at $1,710/oz and possibly toward the next support level at $1,691/oz.> Iron ore exports from Brazil up 33% y-o-y, while stockpiles at Chinese ports at highest level in 22 months. However, Chinese demand for iron ore is likely set to drop in 2021, which is negative for iron ore prices.OIL CLIMBS ON WEAKER DOLLAR, SURGING STOCK MARKETS AMID MIXED OPEC REPORTAfter easing to $68/bbl around the European open yesterday, front-month Brent began to generate positive momentum and rose to $69/bbl ahead of the OPEC monthly report. The OPEC Secretariat revised its 2021 global demand estimate upward by a slight 0.22 mln bpd to 96.27 mln bpd (and up from 90.39 mln bpd estimated for 2020). The demand estimate for OECD countries was revised upward by 0.13 mln bpd, while demand in non-OECD countries was also revised higher, but by a smaller 0.09 mln bpd. First-half demand was revised downward due to the continued measures to control the pandemic, but 2H21 demand was revised higher, which reflects expectations for a stronger economic recovery due to the vaccination rollouts. The report also highlighted that "this year's demand growth will not be able to compensate for the major shortfall from 2020 as mobility is forecast to remain impaired throughout 2021." Countering the upbeat demand forecast revision was a hike in the non-OPEC supply estimate for 2021 by 0.47 mln bpd. Supply from Russia was revised upward, whereas the supply estimate from non-OECD countries was trimmed. The Secretariat sees US liquids production up 0.16 mln bpd y-o-y, unchanged from last month. Important to highlight is that this was the first OPEC report when the Saudis' voluntary 1 mln bpd production cut became visible in the statistics - Saudi production fell by 0.93 mln bpd m-o-m to 8.15 mln bpd in February. In addition, note that, partly due to the higher non-OPEC supply forecast, OPEC trimmed its estimate of global demand for OPEC crude to 27.3 mln bpd this year, which nevertheless would allow for higher average OPEC production in 2021. Following the report's release, Brent dipped to $68.5/bbl.However, the correction proved short-lived, as Brent eventually rallied toward $69.8/bbl in the late US trading hours, the driver being rallying global stock markets, with the S&P 500 extending gains for a third day and climbing to a record high. Major events leaned bullish, including the signing of the $1.9 trln US fiscal stimulus, better than expected US jobless claims and the ECB decision to step up asset purchases in the near term. Moreover, the dollar weakened against baskets of major DM and EM currencies, which also provided tailwinds for oil. Brent eventually settled at $69.63/bbl, $1.73/bbl above the previous settlement. This morning, Brent has inched lower and is trading near $69.5/bbl as the dollar has begun to rebound. Today, investors will eye eurozone January industrial production, the US February PPI, the preliminary Michigan consumer sentiment index for March and a Baker Hughes rig count update. In our view, if the US PPI data turns out upbeat, as expected, UST yields would rise, which would dampen the ongoing risk rally. Against this backdrop, we would expect Brent to remain capped below yesterday's high of $69.8/bbl throughout the day or even to slide below the $69.3/bbl support.GOLD PRICES EASED AMID UPBEAT US JOBLESS CLAIMS DATA AND FIRMER US YIELDS; US PPI EYEDYesterday, after rallying to as high as $1,740/oz early in the day, gold prices began to slide, first to $1,730/oz and then toward $1,720/oz. One of the highlights yesterday was the ECB's decision to significantly increase the pace of purchases of government bonds over the next quarter. German Bund yields fell on the headline, but EUR/USD held at its higher levels. ECB President Christine Lagarde said that the ECB is watching the exchange rate, adding that it is ready to recalibrate its tools. Also, later yesterday, US President Joe Biden signed the $1.9 bln fiscal stimulus bill into law. Its progress through Congress has been one of the major catalysts behind this year's surge in Treasury yields and the reflation trade in general. According to White House Press Secretary Jen Psaki, Americans will begin to see direct payments as early as this weekend. While gold is considered a hedge against inflation that could stem from the widespread stimulus, higher bond yields have undermined that as they raise the opportunity cost of holding bullion.The major data highlight yesterday was the number of US initial jobless claims having fallen to a four-month low. This lifted the US 10y yield above 1.5%, in turn providing headwinds to gold prices. In light of the improving labor market, the vast US stimulus is being taken as an excessive measure - thus driving US yields higher. In focus today will be the US PPI for February, which is expected to grow at 0.5% m-o-m, but given the strong growth observed in the price subindex of the PMI indexes, a stronger print could well be forthcoming. If this happens, the US 10y yield could approach 1.6% and the risk rally of recent days might give way to a correction. This could send EUR/USD down to 1.19 and result in gold prices breaking below support at $1,710/oz, possibly retreating toward the next support level at $1,691/oz.IRON ORE EXPORTS FROM BRAZIL UP 33% Y-O-Y, WHILE STOCKPILES AT CHINESE PORTS AT HIGHEST LEVEL IN 22 MONTHSData from the first week of March show that average daily exports of iron ore from Brazil climbed 33% y-o-y, while stockpiles of iron ore at Chinese ports reached 128 mln tonnes (five weeks' worth of domestic consumption), the highest level in 22 months. In China, 82% of the ore feedstock for the steel industry is imported, primarily from Brazil and Australia. Following the accident at the Vale mine in 2019, stockpiles in China fell and iron ore prices rose to their highest levels since 2014. The current increase in Brazilian exports and Chinese stockpiles clearly indicates that China has solved its issues with iron ore supplies. However, this month China's ministry of industry and trade ministry announced that it will soon unveil a program to reduce steel smelting capacity in the country. The specific parameters of the reduction are not yet known, but based on statements by top Chinese officials, the decrease in smelting will be relative to 2020 levels. We think this makes sense given that the volumes of new housing construction (the main consumers of steel) in China dropped 1.9% in 2020 despite massive stimulus programs. Over the past five years (2016-20), 150 mln tonnes (16% of the total) of annual steelmaking capacity has been removed. However, steel production has continued to increase thanks to increased utilization of existing capacity. By 2020, capacity utilization had reached 96%. However, shutting down steel plants will lead to an actual decrease in output - and thus lower consumption of iron ore. Meanwhile, this year China will introduce a carbon emissions trading scheme similar to the one operating in the EU. This could eventually make smelting steel from iron ore more expensive than using scrap.