Commodities Daily - March 23, 2022

> Oil prices begin to stabilize after recent rally ahead of weekly EIA inventory report. This morning, Brent is rallying toward $118/bbl, as a key Kazakh-Russian oil pipeline (CPC) may be forced to reduce shipments via a vital Black Sea terminal by as much as 1 mln bpd for several weeks due to storm damage, and as API reported draws in crude oil, gasoline and distillate stocks last night. We think Brent could rise to $120/bbl today amid persisting supply risks and a likely mixed weekly EIA inventory report.> Gold slides as Treasury yields continue to rise. Gold slipped back from $1,935/oz to $1,920/oz yesterday, while the 10y US Treasury yield rose from 2.29% to 2.39%. Gold is trading near $1,922/oz as we write. Markets await a speech by Fed Chairman Jerome Powell and eurozone consumer confidence for March. We expect bullion to test support at $1,910/oz today.> Base metals return to technical support levels; thermal coal seems to have found a new equilibrium. Base metals closed in the red yesterday, with prices continuing to hover around technical support levels. Thermal coal also seems to have found a new equilibrium. For both base metals and thermal coal, we think the risks are tilted toward the upside.OIL PRICES BEGIN TO STABILIZE AFTER RECENT RALLY AHEAD OF WEEKLY EIA INVENTORY REPORTYesterday, after peaking near $119.5/bbl, Brent began to slide, consolidating within a range of $112.5-117.3/bbl for the rest of the day, with low liquidity in the futures market fueling elevated volatility. The CEO of Vitol yesterday highlighted that "the cost of trading energy markets is currently enormous." Exchanges are aggressively increasing their margin requirements and risk managers are forcing traders to reduce their exposure, which has caused liquidity to rapidly evaporate. For example, ICE raised the Brent crude margin requirement by 32% and the requirement for the front-month gasoil contract by 90%. It will take weeks of price stability before exchanges ease the margin requirements and clearing limits, which are critical factors for global commodity flows. But until the financial system that the energy markets operate within stabilizes, prices and spreads are unlikely to increase significantly, as there is not enough risk appetite amid the current volatility, even though many market participants believe the market will ultimately head higher (as do we). Yesterday, front-month Brent eventually settled at $115.48/bbl, fixing $0.14/bbl below the previous settlement.This morning, Brent is rallying toward $118/bbl, as a key Kazakh-Russian oil pipeline (CPC) may be forced to reduce shipments via a vital Black Sea terminal by as much as 1 mln bpd for several weeks due to storm damage. While the full extent of the damage at the sea terminal of the Caspian Pipeline Consortium has yet to be assessed, the disruptions may also affect Russia's overall oil production volumes, Deputy Energy Minister Pavel Sorokin said yesterday. We note that some 90% of the crude carried through the conduit originates in Kazakhstan, with the giant Tengiz, Kashagan and Karachaganak oil projects accounting for almost all of that. The link also carries some crude of Russian origin, which is injected into the CPC pipeline along the route. Price support has also come from the API inventory report published overnight showing draws in stockpiles of crude oil (-4.28 mln bbl), gasoline (-0.63 mln bbl) and distillates (-0.83 mln bbl). We think Brent could rise to $120/bbl today amid persisting supply risks and a likely mixed weekly EIA inventory report. We see US crude oil stocks building by around 3.1 mln bbl in today's EIA report, as barrels continue to rapidly exit the US strategic petroleum reserves. Overall, we expect US crude oil stocks to build by 7.3 mln bbl in March and draw by 4.2 mln bbl in LD SLIDES AS TREASURY YIELDS CONTINUE TO RISEGold slipped back from $1,935/oz to $1,920/oz yesterday, while the 10y US Treasury yield rose from 2.29% to 2.39%. Meanwhile, EUR/USD traded sideways near 1.102. Treasury yields continued to rise, with the real 10y yield, which factors in inflation expectations, climbing to -0.55%, up 20 bps since Monday's close. That created fundamental pressure for bullion, a non-yielding asset. Gold continued to react to Powell's hawkish comments on Monday indicating that the Fed was ready for tougher monetary policy adjustments. It also responded to a correction in commodity prices (a strong pro-inflationary factor) after three days of growth (based on Bloomberg's commodity index). Macroeconomic factors also provided headwinds for bullion yesterday. For instance, the Richmond Fed manufacturing activity index rose to 13 points, topping the consensus estimate of 2. This was a positive sign for the US economy and may have helped build the case for more aggressive Fed hikes. Fed officials also continued to provide hawkish signals. Cleveland Fed President Loretta Mester said that it might be appropriate to raise the federal funds rate to 2.5% by the year-end, which is 0.5 pp higher than the latest dot plot projected. In addition, St Louis Fed President James Bullard reiterated his view that more aggressive tightening is needed to fight inflation.During the Asian trading session today, gold was quoted near $1,922/oz. Markets await a speech by Fed Chairman Jerome Powell, eurozone consumer confidence for March and US new home sales for February. The head of the Fed is likely to speak out quite clearly again about the need to bring down inflation, which would diminish the attractiveness of gold. Likely mixed macro data will probably not be enough to offset the impact on prices from the hawkish Fed narrative. We therefore expect bullion to test support at $1,910/oz SE METALS RETURN TO TECHNICAL SUPPORT LEVELS; THERMAL COAL SEEMS TO HAVE FOUND A NEW EQUILIBRIUMBase metals closed in the red yesterday. The 3m LME contract for copper fell 0.26% (-$27/tonne from the previous day's close) to settle at $10,268/tonne, aluminum dropped 0.47% (-$16/tonne) to $3,505/tonne, nickel plunged 10.84% (-$3,424/tonne) to $28,159/tonne and zinc declined 1.32% (-$52/tonne) to $3,888/tonne.For the first time since trading in nickel on the LME resumed last week, futures were able to rebound somewhat yesterday (nickel futures had quickly plunged to the down-limit in each of the previous sessions). After plunging another 14% to $26,675/tonne, the 3m contract recovered to finish the session at $28,159/tonne. Nickel futures are currently trading very close to technical support at the 50-day moving average of around $25,000/tonne. We believe that nickel will continue to see support at these levels over the medium term, since the risks to the upside still prevail. The rest of the base metals are also hovering close to technical support at their 50-day moving averages.Thermal coal prices seem to have found support as well, with Newcastle FOB Australia and API2 both currently fluctuating between $200/tonne and $250/tonne. The free fall in thermal coal has stopped, and prices are now looking for a new equilibrium level. We believe equilibrium will turn out to be a bit above the 50-day moving average, which lies in the $200-230/tonne range. We still think that prices are more likely to rise than decline from the current levels, as the risks on the supply side remain relevant. Any news that might add to the concerns about supply chain disruptions will likely push prices higher, as quotes have become extremely sensitive to such developments given how tight the global market has