Commodities Daily - March 3, 2022

> Oil continues to surge following OPEC+ meeting, EIA inventory report. We expect Brent to test the $120/bbl mark today as investors continue to fear supply shortages while focusing on the developments in Ukraine, with one eye on DM service sector PMIs for February.> Gold slides on Powell's hawkish rhetoric. Gold slid from $1,945/oz to $1,930/oz yesterday, while the 10y US Treasury yield rose from 1.73% to 1.86%. Gold is trading near $1,925/oz as we write. Markets await Markit and ISM services PMI readings for February and January factory orders from the US, along with Fed Chairman Jerome Powell's second day of testimony before Congress. We expect bullion to trade in the $1,910-1,940/oz corridor today.> Rally in metals extends on high geopolitical risks. Base metals continued to rally yesterday as tensions over Ukraine remained tense. Thermal coal quotes, meanwhile, are soaring to record highs on a number of factors, which have come together at the same time. All metals - base and metallurgical - are now very closely tracking geopolitical risks. For now, we see no significant factors that could stop the rally.OIL CONTINUES TO SURGE FOLLOWING OPEC+ MEETING, EIA INVENTORY REPORTBrent was fluctuating within a $107-114/bbl range yesterday before climbing to $115/bbl later on, with the futures curve moving into super-backwardation, indicating extreme scarcity. Despite this, OPEC+ ratified its plan for another modest supply increase. The group agreed to add another 0.4 mln bpd in April, though its track record suggests it could once again struggle to deliver this increase, as some members face supply constraints. Given that the market is already tight, this could lead to further upside for prices. Meanwhile. OPEC's oil production increased last month by the most since July as conflict-torn Libya restored disrupted exports and other producers delivered scheduled increases. The 10 OPEC countries involved in the accord to regulate supplies (i.e. excluding Libya and Iran) raised production by around 0.23 mln bpd, close to the full 0.25 mln bpd amount pledged (the remaining 0.15 mln bpd is the share from non-OPEC producers). In the wake of yesterday's OPEC+ meeting, the market will look to consuming nations to see whether they will follow through on suggestions for another emergency stockpile release coordinated by the IEA. Negotiations to lift sanctions on Iran's oil exports are gaining increasing importance, while Saudi Arabia and its gulf neighbors are in a difficult position given pressure from the US and other consumers to open the taps as prices surge. The case is certainly building for a tense OPEC+ meeting scheduled for March 31.The weekly EIA inventory report indicated a surprise 2.6 mln bbl decline in crude inventories, contrasting with the API's estimate of a 6 mln bbl decrease. Crude inputs at US refineries rose to 15.4 mln bpd last week as some refineries came back online following maintenance. US weekly crude exports jumped over 40% to their strongest level since July 2021. Despite widespread reports of drillers ramping up shale supplies, weekly production held steady for a fourth week. Among products, seasonal US distillates demand rose to its highest level in 14 years on a four-week basis due to strong demand from trucking and agriculture, which has been outweighing reduced demand for heating. Gasoline demand continued to rise despite rising retail prices, eating into inventories during a period when stockpiles traditionally build ahead of the driving season. Brent ended yesterday at $112.93/bbl, up $7.96/bbl on the day.This morning, Brent has climbed to $118/bbl as buyers continue to avoid Russian crude, with some media reports suggesting that the elevated prices could remove as much as 1 mln bpd of oil demand. We expect Brent to test the $120/bbl mark today as investors continue to fear supply shortages while focusing on the developments in Ukraine, with one eye on DM service sector PMIs for LD SLIDES ON POWELL'S HAWKISH RHETORICGold slid from $1,945/oz to $1,930/oz yesterday, while the 10y US Treasury yield rebounded from 1.73% to 1.86%. EUR/USD traded sideways near 1.111. In the gold market, the ongoing geopolitical tensions were outweighed by Fed Chairman Jerome Powell's testimony in the US Congress and upbeat US economic data. The February ADP US employment report showed a 475k increase in private payrolls after a more than 300k decrease in January. This is a good sign for the official labor market report, which will be published on Friday, but not a great sign for gold, since it seems to put the US labor market closer to the Fed's objective of maximum employment, building the case for more aggressive rate hikes. During his testimony, Powell made it clear that he was currently in favor of a 25 bp rate hike at the March FOMC meeting, but he said that the Fed could move more aggressively if the upcoming inflation data comes in high. He also spoke about the geopolitical risks, noting that they would likely reshape Western economies. His colleague James Bullard, the head of the St Louis Fed, also spoke yesterday and called for a swift withdrawal of accommodation. Meanwhile, Chicago Fed President Charles Evans said that he does not expect any more than a 25 bp hike at the March meeting, though he remarked that inflationary pressures remain elevated and there are no clear signs that inflation is set to slow anytime soon. All of these fundamental factors weighed on gold prices, along with the rise in Treasury yields. During the Asian trading session today, gold slipped back to $1,925/oz. Markets await Markit and ISM services PMI readings for February and January factory orders from the US, along with Fed Chairman Jerome Powell's second day of testimony before Congress. It is not likely that Powell will provide any new clues on future monetary policy developments, while the consensus estimates for today's macro data suggest that it will be strong, so gold could face pressure later in the day. However, geopolitical news flow remains the main driver and new developments could push gold in either direction. All in all, we expect bullion to trade in a $1,910-1,940/oz corridor LLY IN METALS EXTENDS ON HIGH GEOPOLITICAL RISKSBase metals closed with gains yesterday. The 3m LME contract for copper was up 1.04% (+$104/tonne from the previous day's close) to settle at $10,166/tonne, aluminum surged 2.62% (+$91/tonne) to $3,569/tonne, nickel rose 3.09% (+$776/tonne) to $25,879/tonne and zinc jumped 3.07% (+$115/tonne) to $3,861/tonne.Base metals continued to rally on rising geopolitical risks, with some of the metals reaching new highs again. Aluminum hit another record, climbing to $3,600/tonne in the second half of the trading day. According to Bloomberg, aluminum notched a new record a new record this morning, nickel surged again and zinc reached its highest level since 2007 at $3,999/tonne. Even if there have been no direct sanctions against Russian commodity producers yet, the surging base metals prices seem to indicate that there is already supply disruption in these markets. Soaring global fuel prices, combined with the increasing difficulty to transport production to and from Russia, are already affecting supply chains and are likely to exacerbate the deficits that all base metals markets have been experiencing before this Ukraine crisis. With base metals delivering zero reaction to the Fed decision to hike the key rate this month, we expect prices to continue hitting new highs amid the tense geopolitical situation.The thermal coal market, meanwhile, is experiencing an unprecedented rally, with Newcastle FOB Australia quotes soaring 77% for the last three days to almost $450/tonne. This comes in line with worsening natural gas situation in Europe and growing fears over a coal supply disruption from Russia. It also comes at a time of shipment shortages from Russia and Mongolia to China due to Covid-related restrictions, as well as flooding in Australia amid a cyclone. With Chinese authorities seemingly unable to tame the factors driving coal quotes to record highs, we now see no reasons for thermal coal prices to come down from the current levels in the near