Commodities Daily - November 2, 2021

> Oil ticks higher amid expectations of OPEC+ sticking to its gradual supply increase plan. Brent is hovering below $85/bbl this morning. Today, investors will eye US October vehicle sales data, quarterly earnings from BP and ConocoPhillips, as well as the weekly API update on US oil and refined product inventories. Given the lack of bullish catalysts, we think Brent will likely stabilize within the $84-85/bbl range after yesterday's rally.> Gold rebounds toward $1,800/oz with US manufacturing growth easing amid lingering supply chain issues. This morning, gold is trading near $1,795/oz. Fed policymakers are set to decide tomorrow on whether to start scaling back the central bank's massive bond-buying program. We think traders will start positioning themselves for what is expected to be a hawkish outcome later today, which could weigh on gold, pushing it toward $1,780/oz.> Most base metals finish higher, with coal and iron ore still in retreat. Base metals mostly traded higher yesterday, though the gains were modest. Meanwhile, coal remained in free-fall and iron ore extended its losses as Chinese steel mills cut their production in response to instructions from the authorities to reduce their steel output this year and at the beginning of 2022.OIL TICKS HIGHER AMID EXPECTATIONS OF OPEC+ STICKING TO ITS GRADUAL SUPPLY INCREASE PLANMidday yesterday, Brent bounced off the $83/bbl mark and rallied toward $85.1/bbl, mirroring movements in the FTSE 100. This came amid better than expected October manufacturing PMI data out of China and the US. Although despite beating consensus estimates, manufacturing growth in the US actually eased m-o-m in October as supply chain issues linger. Meanwhile, investors are preparing for the OPEC+ meeting this Thursday, with Kuwait yesterday becoming the latest country to say the group should stick with its plan to increase output only gradually. Brent eventually settled at $84.71/bbl, $0.33/bbl above the previous settlement.We would highlight that the recent headlines implying that additional Iranian supply will return soon and fears that OPEC+ will add more than the scheduled 0.4 mln bpd in December (that contributed to the recent price correction) both seem to be unfounded and will not alter the ultimate trajectory for prices. India, Japan and the US continue to call for a hike above the planned 0.4 mln bpd in order to cool prices. However, OPEC+ appears to still prefer sticking to its plan. The bar for it to do more is very high and veiled threats about the US making releases from its strategic petroleum reserve will make little difference. Indeed, key OPEC+ officials have struck a defiant tone of late. In particular, the Saudi energy minister, Prince Abdulaziz, reiterated several times in the past few weeks that gas and coal prices are far higher than oil prices and that asking OPEC+ to raise production more quickly will not solve the problem.Ultimately, OPEC+ sees little need to add more barrels going into 1Q22 when inventories build seasonally (the OPEC Secretariat expects 1.3 mln bpd of stock builds next year). Although one can be skeptical about the Secretariat's balances, that does not mean OPEC+ will alter its approach. Prince Abdulaziz has explicitly stated the group expects "a challenging year in 2022 if we don't attend to the situation amicably, and with the same resolution {as in May 2020}". Adding extra barrels now only to have to remove them later is a situation the group is not willing to risk. Reaching the current compromise took a long and painstaking negotiation in July, particularly between Saudi Arabia and the UAE, which no one wants to unravel. This morning, Brent is hovering below $85/bbl. Today, investors will eye US October vehicle sales data, quarterly earnings from BP and ConocoPhillips, as well as the weekly API update on US oil and refined product inventories. Given the lack of bullish catalysts, we think Brent will likely stabilize within the $84-85/bbl range after yesterday's LD REBOUNDS TOWARD $1,800/OZ WITH US MANUFACTURING GROWTH EASING AMID LINGERING SUPPLY CHAIN ISSUESYesterday, gold gained $15/oz, rallying toward $1,795/oz thanks to its value as a hedge against inflation. This is because the ISM manufacturing sector report published yesterday indicated that supply chain challenges have persisted and supplier delivery times are getting longer, which is causing shortages and in turn stoking inflation. Demand seemingly remains strong, as retail inventories continue to be depressed, which should help keep manufacturing humming and prices high. However, gold's advance came to a halt as traders began to weigh the prospects of tighter monetary policy and the impact that would have on the global recovery ahead of this week's central bank meetings. Policymakers from the Federal Reserve are gathering today and tomorrow and are expected to decide to start scaling back the central bank's massive bond-buying program. Investors will also look out for any hints from Fed Chairman Jerome Powell on the prospects for rate hikes amid the persisting inflationary pressures, which have been stoked by rising commodity prices and pandemic-related supply chain disruptions. The Reserve Bank of Australia already met earlier today, while the BoE meets on Thursday.This morning, gold is trading near $1,795/oz. The highlight on today's macro calendar is October US vehicle sales data. US consumers have recently seen the conditions for buying a car as unfavorable, and we suspect their perceptions only continued to sour in October. A combination of chip-constrained supply and strong demand will push prices higher in 4Q21, though we think the pace of sales growth may have edged slightly higher in October. We expect traders to start positioning themselves for a likely hawkish outcome to the Fed meeting later today, which could weigh on gold, pushing it toward $1,780/ ST BASE METALS FINISH HIGHER, WITH COAL AND IRON ORE STILL IN RETREATOn Friday, base metals closed in positive territory, with zinc an exception. Three-month LME contracts on copper rose 0.62% (+$59/tonne from the previous day's close) to $9,555/tonne, aluminum edged up 0.11% (+$3/tonne) to $2,720/tonne and nickel climbed 1.31% (+$254/tonne) to $19,702/tonne, while zinc dipped 0.62% (-$21/tonne) to $3,358/tonne.Although coal remained in free-fall yesterday, base metals took a break from their recent plunge. The most active coal contract on China's Zhengzhou Commodity Exchange dropped below $150/tonne yesterday and is quoted at around $134/tonne as we write. The Newcastle and API2 November contracts are also trading around the $150/tonne mark. Coal prices have continued to plunge since China's announcement late last week that price caps would be put in place. With the Chinese government eager to tame the domestic energy crisis, we think coal prices are likely to remain in decline.Meanwhile, iron ore prices in Singapore continued to drop yesterday, falling below the $100/tonne mark. Iron ore is currently quoted at close to $92/tonne, set for its fifth straight daily decline. The drop in prices has only accelerated, as cuts to steel production are being implemented more actively as the end of the year draws closer, and since the limits on steel production have been extended through the first few months of 2022 in order to ensure that the skies are clear for the Winter Olympics. According to Mysteel, Chinese crude steel output has fallen to its lowest level since March 2020. This indicates that mills have been adhering to the limits set by the government, suggesting a further drop in prices is likely.