Commodities Daily - March 15, 2022

> Oil prices continue to slide, pressured by new Chinese lockdown. Yesterday, Brent tumbled almost $10/bbl to $103.5/bbl as risks to global demand have emerged amid a resurgence of lockdown measures in China owing to a surge of Covid-19 infections. This morning, Brent has slid further to as low as $100/bbl. > Gold lower as Treasury yields rally. Gold fell from $1,985/oz to $1,950/oz yesterday, while the 10y US Treasury yield rose from 1.99% to 2.13%. Gold is trading near $1,930/oz as we write amid signs for a de-escalation in the geopolitical situation. Markets await US February PPI and ZEW economic sentiment in eurozone for March. We expect bullion to test $1,920/oz support today.> Base metals recede on China news; thermal coal quotes to gain from market rebalancing. Base metals retraced yesterday on growing fears over demand in China, the world's largest consumer, due to a series of lockdowns announced in response to a resurgence in Covid-19 cases. Today, investors have been weighing Chinese economic data suggesting the country got off to a strong start this year. Thermal coal continues to follow EU natural gas quotes lower, but we expect it to find support from a rebalancing in the seaborne market going forward. Hence, a substantial premium is likely to remain, meaning prices should stay elevated.OIL PRICES CONTINUE TO SLIDE, PRESSURED BY NEW CHINESE LOCKDOWNYesterday, Brent tumbled almost $10/bbl to $103.5/bbl as risks to global demand have emerged amid a resurgence of lockdown measures in China owing to a surge of Covid-19 infections. China, the world's largest importer of oil, has placed the 17.5 mln people in Shenzhen under lockdown and has restricted travel from the Jilin province. This is the first time that China has sealed off an entire region since April 2020. Shenzhen and Jilin combined account for 3% of total Chinese gasoline demand and 4% of diesel demand. We expect local officials to announce more restrictions if transmission worsens in other provinces. China is currently battling its worst Covid-19 outbreak in two years, with reported new cases soaring above 2,000 per day (including asymptomatic cases) since March 12. The current wave is seeing more local transmission than previous ones due to the higher transmissibility of the Omicron variant and domestic vaccines being less effective. More widespread lockdowns will weigh on mobility in the coming weeks, which could result in a decrease in demand in 1Q22 and 2Q22 by 0.2 mln bpd and 0.1 mln bpd, respectively. However, we would expect a quick recovery starting in May on the assumption that the lockdowns will be short-lived and demand will fully recover before May, when the week-long Labor Day holiday will likely provide a much-needed boost to domestic travel.This morning, Brent has continued to slide, falling to as low as $100/bbl. Russian crude oil exports are striving to find their way to the global markets despite the lack of buyers. According to Bloomberg, Surgutneftegaz is offering financing flexibility on cargoes of ESPO crude to some customers, while India is working out a mechanism to facilitate trade using local currencies. Today, we think Brent is likely to defend the $100/bbl frontier and should be able to consolidate above this mark. Investors will be eyeing the OPEC monthly oil market report, US February PPI and API data on US oil and refined product inventories that is due LD LOWER AS TREASURY YIELDS RALLYGold fell from $1,985/oz to $1,950/oz yesterday, while the 10y US Treasury yield rose from 1.99% to 2.13%. Meanwhile, EUR/USD slightly rose from 1.091 to 1.094. There are signs that something of a moderate normalization in the situation in Ukraine is possible. The two sides continue to negotiate and there is a certain optimism stemming from the fact that they are both indicating the possibility of agreements in the coming weeks. Over the past week, meanwhile, investors' investments in ETFs increased by 55 tonnes, which puts the gain since February at 100 tonnes. The current decline in prices may also signal that investors are trying to take profits ahead of what is shaping up to be the most hawkish Fed meeting since 2018. The two-day meeting, which begins today, will feature a new "dot plot," which will reveal the expectations of FOMC officials about the prospects for further rate increases. It may end up being in line with the current market's expectations and earlier remarks by Chairman Jerome Powell (a 25 bp hike at each of the remaining seven meetings).During Asian trading session today, gold continue to slide, reaching $1,930/oz amid a further decrease in safe-haven interest. Markets await US February PPI, ZEW economic sentiment in eurozone for March, the NY Empire state manufacturing index for March and eurozone industrial production for January. The consensus for the PPI is 10% y-o-y and 0.9% m-o-m, which may signal that inflation pressure in the US remains significant and that the Fed may take this as a sign of a more hawkish stance from Powell. Despite the influence of fundamental factors, geopolitics remains in focus. Amid the forthcoming macro statistics and as investors position for the FOMC meeting, we expect bullion to test $1,920/oz support SE METALS RECEDE ON CHINA NEWS; THERMAL COAL QUOTES TO GAIN FROM MARKET REBALANCINGBase metals mostly closed in the red yesterday. The 3m LME contract for copper fell 2.44% (-$249/tonne from the previous day's close) to settle at $9,935/tonne, aluminum dropped 4.69% (-$163/tonne) to $3,320/tonne, nickel closed flat at $48,033/tonne and zinc slipped 0.16% (-$6/tonne) to $3,809/tonne.Yesterday, the LME said it would resume nickel trading on Wednesday. Apart from introducing daily price limits for trading in nickel (a 5% change in either direction), the LME will now require brokers to share more information about the positions held by their clients. The exchange has also introduced price limits for trading in all other base metals (15% moves in either direction), which all but confirms that there is a risk of short squeezes in other markets similar to what we saw with nickel. Yesterday, base metals continued to retreat from their recent highs as it became evident that the EU's new sanctions would not affect Russian base metal exports. The decline in prices was also driven by growing concerns about a demand shock from China, the world's top commodity-consuming country. New Covid-19 lockdowns have restricted economic activity in the country and make it less likely that China will hit its GDP growth target of 5.5% this year. Persisting concerns over the impact of lockdowns might be enough to offset the effect of the upbeat economic data that came out earlier today showing that China started the year on a positive note. Industrial production surged 7.5% y-o-y in February versus the expected 3.9% and last month's 4.3%, while retail sales rose 6.7% versus the consensus estimate of a 3.0% increase. We expect volatility to remain elevated in the coming days as investors await major US macro releases and the Fed's interest rate decision.Thermal coal prices continued to slide yesterday, following natural gas prices in Europe. The June Newcastle FOB Australia contract is now trading around $310/tonne, which seems to be the current equilibrium point. We believe that the further trajectory of prices will depend in large part on the rhetoric from Western countries about whether they intend to stop buying Russian coal. But even more important will be what actions follow, if any. It remains to be seen if Western countries will be able to find suppliers to make up for the loss of Russian coal in a reasonable time frame. At this point, we believe they will not be able to fully replace Russian coal with shipments from Australia, the US, Columbia, South Africa and other countries. This is because the market has been tight since the beginning of 2021 and has only become tighter in early 2022. Hence, a substantial premium is likely to remain in thermal coal prices until the market rebalancing ends. Past experience suggests that this could take more than a few months, as we can still see the impact of China's embargo on Australian coal that took effect in October 2020.