Commodities Daily - March 17, 2021

> Oil inches lower ahead of US inventory update; IEA monthly report and Fed decision eyed as well. Amid what we expect to be a downbeat IEA outlook, mixed EIA weekly inventory report, and global risk-off sentiment following the Fed decision with rising UST yields, we see Brent being pressured toward the $67.3/bbl support level later today. Should this prove wrong and Brent finds positive momentum, it would face the $68.7/bbl resistance level and then the $69.2-70.0/bbl technical range.> Gold treads water ahead of Fed decision. Gold is trading at $1,735/oz as we write. Today, investors await the FOMC announcement. We expect the Fed to update its economic forecasts, which could pressure bullion. We think gold is likely to test the $1,720/oz support level today, which would open the way to $1,700/oz, though if the economic forecasts are lower than expected, gold could retest resistance at $1,740/oz.> Base metal prices fall yesterday on advancing dollar; iron ore global market balance shifting toward surplus. Base metals are sliding due to the strengthening dollar, though nickel remained flat yesterday, supported by disruptions at Nornickel mines. Meanwhile, in the iron ore market, one of China's largest iron and steel hubs announced plans to limit steelmaking to reduce CO2 emissions, which is negative for iron ore prices.OIL INCHES LOWER AHEAD OF US INVENTORY UPDATE; IEA MONTHLY REPORT AND FED DECISION EYED AS WELLEarly in the day yesterday, front-month Brent slid from below $69/bbl to as low as $67.4/bbl, weighed on by rising concerns over vaccinations in Europe and downbeat US February retail sales. Note that the latter were affected by cold weather across the US in February, but March sales are expected to be very upbeat as lower- and middle-income households are to receive pandemic relief money. In addition, US February industrial production was also reported below expectations. This is also likely temporary as expectations are for a strong economic recovery this year, supported by the massive fiscal stimulus and Covid vaccinations. Later in the day, however, Brent pared some of the earlier losses and eventually settled at $68.39/bbl, $0.49/bbl below the previous settlement.Overnight, the API reported a 1.0 mln bbl draw in US crude stocks last week. The refined product data, however, was mixed, showing a 0.93 mln bbl drop in gasoline stocks and a 0.9 mln bbl build in distillate stocks. The EIA weekly inventory report is due today at 17:30 Moscow time. The Bloomberg consensus is for a 2.7 mln bbl crude stock build, 3.5 mln bbl drop in gasoline stocks and 2.6 mln bbl drop in distillate stocks. This morning, Brent is trending higher toward the $69/bbl mark following the API report, which showed an unexpected crude stock draw after two weeks of strong builds. By the time you receive this, investors will be digesting the IEA monthly report, which we expect to be generally downbeat with downward revisions to global oil demand. Meanwhile, we expect today's EIA weekly report to be mixed and to show another crude build (in contrast to the API report) and mixed refined product data. Overall, we see oil price headwinds in the offing.Markets are eyeing the Fed rate decision, though the focus will primarily be the updated economic forecasts to be published. The 2021 GDP growth forecast could be revised upward to 6-7% given the new stimulus spending and progress in fighting the virus. We, however, think that such a revision is already priced in, as various major forecasting bodies, like the OECD, have already made such upward revisions. Meanwhile, the number of FOMC members seeing a rate hike in 2022-23 could grow considerably. If this turns out the case, we think the UST 10y yield could push higher toward 1.70%, while the dollar could advance by 1-2% against most major currencies, weighing on oil prices. In our view, Brent looks set to be pressured toward the $67.3/bbl support level later today. Should this prove wrong and Brent finds positive momentum, it would face the $68.7/bbl resistance level and then the $69.2-70.0/bbl technical range.GOLD TREADS WATER AHEAD OF FED OUTCOMEGold traded sideways yesterday within a $1,720-1,740/oz range while the 10y US Treasury yield stuck around 1.6%. EUR/USD edged down to 1.190. Yesterday's data releases pushed gold above $1,730/oz and caused it to diverge from EUR/USD dynamics. The ZEW eurozone economic sentiment survey rose to 74 in March from 69.6 in February. US retail sales slowed 3% m-o-m in February after climbing 8.7% in January, while industrial production declined 2.2% after growing 1.1% in January. The statistics indicated a patchy recovery in the US, which caused investors to take a closer look at gold, as expectations of further monetary policy tightening may be premature. Gold is trading at $1,735/oz as we write ahead of the FOMC decision later today. Investors will eye policymakers' remarks on the recent spike in bond yields, inflation and the economic outlook. The Fed could significantly upgrade its forecasts in light of the new stimulus package and vaccine progress. We think the GDP forecast for this year could be raised to 6-7%, while the number of committee members expecting a rate hike in 2022-23 could increase significantly. Should this happen, we think the 10y US Treasury yield could rise to 1.7%, which would weigh on gold. Eurozone CPI and US housing starts data for February are also due today. We think gold is likely to test the $1,720/oz support level today, which would open the way to $1,700/oz, though if the economic forecasts are lower than expected, gold could retest resistance at $1,740/oz.BASE METAL PRICES FALL YESTERDAY ON ADVANCING DOLLAR; IRON ORE GLOBAL MARKET BALANCE SHIFTING TOWARD SURPLUSNegative sentiment prevailed on the LME yesterday, with prices dropping after gains on Monday, when the market was buoyed by good industrial production data out of China in January-February. Copper fell 2% to $8,961/tonne, aluminum 1% to $2,203/tonne, zinc 1.7% to $2,810/tonne. Nickel, however, managed to stay flat at $16,150/tonne, supported by disruptions at Nornickel mines. The dollar is strengthening against global currencies today for a fourth session in a row. Since the beginning of March, it has strengthened nine days out of 13, reflecting a strong upward trend and in line with our FX analysts' expectations. The stronger dollar today should create headwinds for trading on the LME today.Below is an update on the iron market:> Steel production in January-February in China was up 12.9% y-o-y at 175 mt, with the per day average at 2.97 mtpd, slightly higher than in 2020 (2.95 mtpd of steel).> In early March, China announced its intention to cut steelmaking capacity and steel production this year. This means that Chinese smelting in March-December 2021 should decrease compared versus January-February. Note that steel production is a key source of air pollution in China, contributing about 15% of the country's total CO2 emissions.> According to CRU, the global iron ore market is currently operating without interruptions in supply for the first time since 2018. Vale, the world's largest iron ore producer, is expected to increase its supply to China and the global market this year. We think this means the balance in the iron ore market will shift toward a surplus, and will decline from the current $160/tonne.> A key issue for forecasting prices for rolled steel and iron ore is whether China will also restrict construction, which accounts for more than 70% of steel consumption in the country. If there are no restrictions, then steel prices should stay high and those for iron ore as well. That said, the production of cement, the main material for construction, is also a major source of emissions, and reducing its production would be a logical step.> In the steelmaking hub of Tangshan (China), where 13% of China's steel is smelted, plans have been announced for a 40% reduction in CO2 emissions from the iron and steel industry in 2021. This implies a reduction in steel production by 50 mt, or 5% of steel production in China. Tangshan has thus become the second major industrial center, after Inner Mongolia, to announce restrictions on metallurgical production. Thus, we are seeing more and more evidence that iron ore demand in China, which accounts for 70% of the world's iron ore imports, could fall significantly this year. We also expect similar restrictions on metallurgical production in other regions of China.