Commodities Daily - November 22, 2021

> Oil slumped as virus restrictions in Europe return with joint SPR release still in focus. Today, investors will eye the October Chicago Fed national activity index and the start of the Libya Energy & Economic summit, which includes several OPEC representatives. In our view, Brent will likely start consolidating closer to $80/bbl as lower prices reduce the odds of a strategic release.> Bullion slides amid hawkish Fed comments. Gold fell from $1,860/oz to $1,845/oz on Friday, while the US 10y Treasury yield dropped from 1.58% to 1.55%. Gold is trading near $1,845/oz as we write. Today, the market awaits the Chicago Fed's national activity index and US existing home sales (both for October), as well as the eurozone consumer confidence reading for November. We expect bullion to trade in a $1,830-1,860/oz range today.> Base metals on the rise, with supply-side factors driving the rally. Base metals traded higher across the board on Friday, buoyed by supply disruptions amid still-tight market conditions. Metals markets are likely to witness high volatility in general and sudden, sharp price moves until some of the supply issues are resolved.OIL SLUMPED AS VIRUS RESTRICTIONS IN EUROPE RETURN WITH JOINT SPR RELEASE STILL IN FOCUSOn Friday, front-month Brent slumped almost $4.2/bbl to as low as $78.05/bbl as the wave of infections in Europe is growing, once again raising the prospect of mobility restrictions that would hit oil demand. Europe has again become the epicenter of the pandemic, despite vaccination rates of around 70% and above in many countries. Austria goes into a full lockdown starting today, while Germany and other nations are cracking down on the unvaccinated as cases spike. Also, just months after people began to return to the office, Germany is poised to agree on mandatory remote working as long as there are no "operational reasons" that stand in the way. The Belgian government has decreed that employees need to work from home four days a week until mid-December. In Ireland and the Netherlands, people have already been instructed to work from home where possible. The return to working at home in parts of Europe stands in contrast to the situation in the UK, which has so far resisted similar measures despite recording some of the region's highest Covid tallies throughout the autumn. The rising cases risk exacerbating the seasonal slowdown in European oil demand (around 15% of global demand). We had previously expected a 2 mln bpd seasonal global oil demand decrease to 98.7 mln bpd from November 2021 to April 2022. This figure may well expand to 2.5 mln bpd amid recent events. Brent eventually settled at $78.89/bbl on Friday, $2.35/bbl below the previous settlement. This morning, Brent is edging higher toward $79/bbl despite Japan's Yomiuri newspaper reporting over the weekend that Tokyo may make a joint announcement of a potential strategic petroleum reserve release with Washington as soon as this week. How much crude the US decides to release will be the big thing the market is looking out for, although the volumes and timing of a Chinese release will also be important. As we noted a few times recently, any releases will need to be pretty large to move the needle on prices (up to 100 mln bbl), as much of it has already been priced in. Today, investors will eye the October Chicago Fed national activity index and the start of the Libya Energy & Economic Summit, which includes several OPEC representatives. In our view, Brent will likely start consolidating closer to $80/bbl as lower prices reduce the odds of a strategic release. This week will also see the Thanksgiving holiday in the US. Prior to that, an announcement will be forthcoming about whether Jerome Powell is reappointed as Fed chairman or whether Lael Brainard will take over. Both are seen dovish and data-dependent and practical-minded policymakers. LLION SLIDES AMID HAWKISH FED COMMENTSGold fell from $1,860/oz to $1,845/oz on Friday, while the US 10y Treasury yield dropped from 1.58% to 1.55%. Meanwhile, EUR/USD sank from 1.137 to 1.129, creating headwinds for bullion. While the macroeconomic agenda was very light on Friday, gold came under pressure from hawkish comments from Fed officials. Vice Chairman Richard Clarida said that the US economy is in a strong position and that it might be appropriate to discuss a faster pace of QE tapering at the December FOMC meeting. Christopher Waller also spoke out in favor of a faster roll-back of the Fed's bond-buying program, saying that the Fed may pivot off near-zero interest rates faster than some currently expect, as the economic recovery is on track and inflation is far above the 2% target. A faster pace of QE tapering would push yields higher, thus increasing the opportunity costs for investing in gold. The hawkish remarks therefore pushed gold to its lowest levels in 10 days.During the Asian trading session today, gold remains near $1,845/oz and seems to be trending lower. Today, the market awaits the Chicago Fed's national activity index and US existing home sales (both for October), as well as the eurozone consumer confidence reading for November. The key releases later this week include the latest FOMC minutes and US PCE inflation on Wednesday, along with preliminary IHS Markit November PMI readings from DMs tomorrow. Moreover, early this week the White House is expected to announce its choice for the position of Fed chair, as Jerome Powell's term ends in February. We do not expect much volatility in gold prices today, but later this week bullion may face pressure from further hawkish comments from the Fed and upbeat macro data. Overall, we expect bullion to trade in the $1,830-1,860/oz range SE METALS ON THE RISE, WITH SUPPLY-SIDE FACTORS DRIVING THE RALLYOn Friday, base metals closed in positive territory. Three-month LME contracts on copper rose 2.17% (+$205/tonne from the previous day's close) to $9,647/tonne, aluminum climbed 2.43% (+$64/tonne) to $2,680/tonne, nickel picked up 2.06% (+$405/tonne) to $20,044/tonne and zinc added 2.50% (+$78/tonne) to finish at $3,238/tonne.Base metals extended their rally on Friday amid constrained supply and record-low inventories. The premium for copper in China spiked to as high as CNY2,200/tonne ($345/tonne), a level not seen since January 2015. This came mainly as a result of a drop in inventories in Shanghai to below 35 kt in the week ending November 19. Hence, it seems that spot demand is outpacing supply. We believe that as long as inventories remain at multi-year lows, prices will be well supported, with price spikes and bouts of high volatility becoming fairly common.Aluminum also gained on Friday, receiving a boost from the news that there had been an explosion at an aluminum smelter (with annual capacity of 330 ktpa) in China's Yunnan province. However, the news is likely to have only a short-lived effect on aluminum quotes, as the company announced earlier this morning that it had resumed production after adopting emergency measures to deal with the accident. However, the incident did show how sensitive aluminum quotes have become to developments on the supply side given how tight the market has been. As with the copper market, we expect aluminum prices to exhibit high volatility for as long as the market remains tight and inventories remain near recent