Commodities Daily - November 19, 2021

> Oil rises on weaker dollar as pricing-in of coordinated SPR release abates. This morning, Brent peaked at $82.2/bbl before dipping back below $82/bbl. Traders today are looking ahead to Baker Hughes' US active rig count data and a couple of speeches by Fed representatives. In our view, Brent is likely to stabilize around $82/bbl today, as the pricing-in of the potential coordinated SPR release by the US, China and other countries seems to have abated.> Gold slips in response to positive data. Gold slid from $1,865/oz to $1,860/oz yesterday, while the US 10y Treasury yield remained near 1.58%. Gold is trading near $1,860/oz as we write. Today, the market awaits speeches by ECB President Christine Lagarde and Fed officials. We expect bullion to trade in a $1,830-1,860/oz range today.> Base metals mostly higher, as markets still tight; iron ore waiting for direction from Chinese policymakers. Base metals traded mostly higher yesterday, as markets remain tight, which has kept futures curves in backwardation. Iron ore prices have been fairly steady lately, but they are likely to enter into a downtrend soon, as the main group representing China's steel industry is about to come out with a plan for steel output in the years to come.OIL RISES ON WEAKER DOLLAR AS PRICING-IN OF COORDINATED SPR RELEASE ABATESYesterday, Brent rebounded from $79.3/bbl and started to rise toward $81.4/bbl amid a rare bout of dollar weakness, as buyers were enticed by the sub-$80/bbl prices (in the middle of last week, Brent was trading near $85/bbl). Moreover, in the previous session Brent fell below its 50-day moving average, an important technical level. Front-month Brent settled at $81.24/bbl, $0.96/bbl above the previous settlement. Yesterday, a spokeswoman for China's National Food and Strategic Reserves Administration said that "the bureau is carrying out crude oil release work at the moment." It is unclear if the Chinese authorities are doing so in response to the US's request or if they had already been planning a release. The US understands that releasing oil reserves on its own would have a limited price impact, so it wants a coordinated release. However, the IEA is not keen to get involved in addressing political concerns rather than a supply emergency. Hence, the US is reaching out to Asian governments. But IEA members can only release from strategic reserves if there is a supply outage, and media reports suggest Japanese law prohibits the country from using its SPR to lower prices. Statements from South Korean officials also suggest reluctance to use the SPR in this way. Both Japan and Korea are most likely to act only if an oil supply shortage occurs and it impacts economic growth. While there is no supply shortage currently, both countries might eventually be won over, although this could require some strong political inducements.As for China, the country may score some political points by going along with the Biden administration. Moreover, it has already been releasing reserves over the past few months to tame domestic prices. Official SPR releases in China so far have been very small (4 mln bbl of crude and less than 5 mln bbl of refined products), and they were mostly politically motivated actions to tame the price rally in the domestic market. However, for the Chinese government, inflation (especially for fuel costs) is not a particularly urgent issue after its successful intervention to rein in domestic coal prices, thus easing the power shortage. Indeed, China's greater reliance on public transport for commuting and long-distance travel means that it has more tolerance for higher oil prices. The current rumor is that China could release 7 mln bbl of Russian ESPO crude oil (in addition to an expected 10-15 mln bbl normal SPR auction in Zhoushan), but we think the actual release could be smaller and perhaps include other grades. Important to note is that any oil released from the Chinese SPR needs to be replaced within 90 days. This is true for all Asian countries' strategic reserves, except for those of Japan, which has already released 4.2 mln bbl this year. Thus, the market should also focus on where Asian countries would find crude to refill tanks given how low stockpiles are. In fact, given that Chinese majors have exhausted all of the crude stocks they built up over 2020, any price decline caused by an SPR release would only provide a window of opportunity to boost purchases and restock.This morning, Brent peaked at $82.2/bbl before dipping back below $82/bbl. Traders today are looking ahead to Baker Hughes' US active rig count data and a couple of speeches by Fed representatives. In our view, Brent is likely to stabilize around $82/bbl today, as the pricing-in of the potential coordinated SPR release by the US, China and other counties seems to have LD SLIPS IN RESPONSE TO POSITIVE DATA Gold slid from $1,865/oz to $1,860/oz yesterday, while the US 10y Treasury yield remained near 1.58% and EUR/USD edged up from 1.132 to 1.137. Yesterday's data releases and comments from Fed officials gave gold no chance to make gains. On the data front, US initial jobless claims reached 268k last week, their lowest level since the pandemic began. The Philadelphia Fed business outlook for November rose to 39 points, well above the consensus forecast of 24 points, while the US leading indicators beat expectations with a 0.9% increase last month. The positive statistics signaled a strong recovery, especially from the labor market, further supporting the view that the Fed will turn more hawkish. This view was bolstered by some Fed officials, such as St Louis Fed President James Bullard, who said the regulator should turn more hawkish, and Chicago Fed President Charles Evans, who signaled that the Fed could raise rates from zero next year once it has ended its bond-buying program, though he also said it could even do so in 2023. Atlanta Fed President Raphael Bostic said it would be appropriate to raise rates next summer. These comments helped to push gold lower, as ultra-low interest rates appear set to end. However, given that Fed officials have provided mixed comments over the past few weeks, we have yet to see a generally hawkish line from the central bank, which means that gold could find some support should we see further dovish opinions.Gold is trading near $1,860/oz as we write. Today, the market awaits speeches by ECB President Christine Lagarde and Fed officials. A lack of data today could be positive for bullion should any of the speeches prove dovish. Should the opposite happen, the bearish trend will likely continue. We expect bullion to trade in a $1,830-1,860/oz range SE METALS MOSTLY HIGHER, AS MARKETS STILL TIGHT; IRON ORE WAITING FOR DIRECTION FROM CHINESE POLICYMAKERSYesterday, base metals closed higher, with zinc an exception. Three-month LME contracts on copper rose 0.75% (+$70/tonne from the previous day's close) to $9,477/tonne, aluminum edged up 0.30% (+$7/tonne) to $2,247/tonne and nickel climbed 1.45% (+$280/tonne) to $19,635/tonne, while zinc dropped 0.68% (-$22/tonne) to $3,170/tonne.Most base metals markets remain in backwardation, with spot prices higher than quotes on three-month contracts. This suggests markets are still relatively tight. The LME spot to three-month spread for copper is on the rise again. After plunging from a peak of more than $1,100/tonne in mid-October to as low as $16/tonne recently, it recovered to $67/tonne yesterday. Meanwhile, the premium for spot copper in Shanghai is up 3% today, as investors are still worried about the fact that inventories are at multi-year lows. Although copper stockpiles in warehouses across the globe are likely to remain low in the medium term, next year will see an increase in supply due to the expansion of mines in Latin America and a buildup in refined copper inventories as Chinese refiners return to full capacity. The likely increase in supply combined with slower end-user demand in China and tighter policy from the Fed is likely to put a lid on copper prices in 2022.Iron ore futures are 3% higher in Shanghai as we write, with a potential slight pickup in construction activity close to the year-end likely to stabilize the market. However, in the medium term, China's power rationing and emissions control will continue to weigh on steel mills' demand for iron ore. We believe output cuts are likely to peak this winter under the dual-control policy, as Chinese authorities have pledged to make sure the air is clean and the skies are blue for the upcoming Olympics. Yesterday, China's Iron and Steel Association said it would soon unveil its long-term plans for reining in emissions and eventually making the industry carbon-neutral. We expect the group to lay out a plan to maintain a steel output ceiling in the years to come, which would likely drag iron ore futures