Commodities Daily - March 2, 2022

> Oil prices surge ahead of OPEC+ meeting. This morning, Brent rallied to as high as $111/bbl, and it is likely to rally even higher later today despite the IEA's announcement of a coordinated 60 mln bbl SPR release across OECD countries. This suggests that the stockpile release significantly underwhelmed expectations and could prompt the IEA to release more in the coming weeks. While we expect OPEC+ to decide to continue with the planned 0.4 mln bpd quota hike in April at its meeting today, pressure is building for Persian Gulf countries to produce more crude.> Gold firms as US Treasury yields slide. Gold jumped from $1,910/oz to $1,945/oz yesterday, while the 10y US Treasury yield slid from 1.86% to 1.73%. Gold is trading near $1,935/oz as we write. Today, the market awaits the US ADP employment report for February. We expect bullion to trade in a $1,920-1,950/oz range today.> Another day, another surge in metals prices. Base metals continued to climb yesterday. The key drivers remained the same: the threat of sanctions on Russian raw material producers, an escalating energy crisis and supply disruptions from Ukraine. Exposed to all of these risks, thermal coal is also soaring to new highs.OIL PRICES SURGE AHEAD OF OPEC+ MEETINGYesterday, front-month Brent rallied as much as $9.4/bbl to $107.7/bbl, as most buyers of Russian oil and refined products remained on the sidelines, awaiting more details on the various restrictions that have been announced by governments around the world, though the measures introduced so far have excluded energy trading. About 70% (3.85 mln bpd) of Russian crude trade is now struggling to find buyers as financing and shipping costs surge. While we still believe that China and India will buy Urals cargoes (given their historically high discount to major international benchmarks) once the legal implications of the banking restrictions become clearer, Russian oil trade is likely to remain largely frozen in the near term. We expect stranded crude to drop from the current 70% to less than 20% of the total Russian crude trade once some clarity emerges. An increased flow of Urals eastward will weigh on Dubai benchmark calendar spreads. We note, however, that Urals and other grades from FSU countries that are being exported via Novorossiysk will need to remain heavily discounted to offset freight premiums. Buyers are more likely to purchase cargoes if they are offered on a delivered basis. Russia typically exports around 3 mln bpd of crude oil to Europe (including volumes shipped via the Druzhba pipeline), while we think about 1.5 mln bpd could be redirected to China and India based on these countries' typical crude intake. Urals has a similar quality and results in similar refinery yields to the combinations of crude that China and India typically run (such as a combination of Arab Light, Arab Medium, Johan Sverdrup, Oman and Zakum). However, these Urals import levels would be unprecedented for the two countries. We note that Chinese and Indian refining kits may struggle to take in more Urals than this, as they are not designed to run large quantities of the grade. This morning, Brent rallied to as high as $111/bbl, and it is likely to move even higher later today despite the IEA's announcement of a coordinated 60 mln bbl SPR release across OECD countries to help ease the trade flow disruptions caused by the uncertainty around Russian supplies. The fact that prices have continued to climb following the announcement suggests that the stockpile release has significantly underwhelmed expectations and could prompt the IEA to release more in the coming weeks. While we expect OPEC+ to decide to continue with the planned 0.4 mln bpd quota hike in April at its meeting today, pressure is building for Persian Gulf countries to produce more crude. Even if OPEC+ did promise more supply (which would be politically challenging to implement), the market's lack of spare capacity means the additional barrels would merely be front-loading supply that would be needed later in the year - demand is set to peak during the summer months as LD FIRMS AS US TREASURY YIELDS SLIDEGold climbed from $1,910/oz to $1,945/oz yesterday, while the 10y US Treasury yield slid from 1.86% to 1.73%. EUR/USD eased from 1.121 to 1.111. The geopolitical situation escalated again, prompting investors to seek to hedge the risks via gold. Treasury yields slid considerably on safe-haven demand, which boosted bullion. The fundamental backdrop for bullion remains less bullish, as the Fed appears to be preparing for a rate liftoff at the FOMC meeting in mid-March. The February US ISM manufacturing PMI came in at 58.6, above the consensus of 58. The report cited positive developments on the demand/consumption side, but respondents are still seeing supply chain problems. Cleveland Fed President Loretta Mester yesterday said there were upside risks to inflation and downside risks for economic growth forecasts. She added that the main challenge for the regulator is to recalibrate monetary policy without harming the economy. Atlanta Fed President Raphael Bostic said that getting inflation below 3% in this year may be a challenge. We see inflation pressure as the key downside risk for bullion, as the Fed could take more significant steps to curb price growth.Gold is trading near $1,935/oz as we write. Today, the market awaits the ADP employment report for February and Fed Chair Jerome Powell's testimony to the US Congress. The consensus expects the ADP report to show a rise of 375k after a decline of more than 300k in January. Meanwhile, Powell will likely signal a rate liftoff and new clues for further monetary policy adjustments. Geopolitical risks remain elevated and are creating a tailwind for bullion, offsetting pressure from hawkish Fed rhetoric. We expect bullion to trade in a $1,920-1,950/oz range OTHER DAY, ANOTHER SURGE IN METALS PRICESBase metals surged yesterday. The 3m LME contract for copper rose about 1.80% (+$78/tonne from the previous day's close) to settle at $10,062/tonne, aluminum surged 3.25% (+$109/tonne) to $3,378/tonne, nickel rose 3.38% (+$821/tonne) to settle at $25,103/tonne and zinc was up 2.18% (+$80/tonne) at $3,746/tonne.Geopolitical risks continued to increase given a possible disruption of Russian raw material supplies, while these markets had been tight long before. The deepening energy crisis is pushing power-dependent metals prices higher too. We now see three key upside risks for base metals prices, some of which are already materializing. The risks also vary by metal. The first one is potential sanctions on commodity producers and a subsequent global supply chain disruption (all metals are subject to this risk). The second, which somewhat relates to the first risk, is higher energy prices amid a supply disruption or ban (this is already happening; aluminum and zinc are the key beneficiaries here). The third is the risk of a supply disruption from Ukraine amid the military conflict and production halts (aluminum output is already suffering). As we see, these risks are already partially being realized and we no longer consider them part of an optimistic scenario. Further escalation will drive base metals higher.The same trends are present for iron ore and especially coal. Thermal coal quotes are extremely sensitive to any news now, as all three mentioned risks are driving prices higher. Newcastle FOB Australia coal breached the $300/tonne level yesterday, while natural gas prices continued to soar. In addition, the rising geopolitical risks have extended fears over a supply disruption from Russia, which is the world's third-largest exporter. We expect thermal coal quotes to remain at these elevated levels or rise further amid the Ukraine