Commodities Daily - November 24, 2021

> Oil rises as announced SPR release falls short of expectations; US inventory data in focus. This morning, Brent is stabilizing and is trading near $82.5/bbl. The API reported US weekly crude oil and gasoline stock builds, while distillate stocks fell. Today, investors will primarily eye the weekly EIA update on US inventory levels with us expecting a more upbeat report than the one released by API overnight with Brent likely to inch closer to $83/bbl as the result.> Gold continues to slide as US Treasury yields head north. Gold slipped from $1,805/oz to $1,790/oz yesterday, while the US 10y Treasury yield surged from 1.63% to 1.67%. Gold is trading near $1,795/oz as we write. Today, the market awaits US PCE inflation for October, the FOMC minutes and a batch of other data. We expect bullion to retest support at $1,780/oz today.> Base metals move slightly lower; coal back on the rise, following gas prices higher. Base metals traded lower yesterday, though the declines were relatively modest. Markets should be starting to price in expectations for the upcoming Fed meeting soon. Meanwhile, coal futures are on the rise again following an uptick in gas quotes.OIL RISES AS ANNOUNCED SPR RELEASE FALLS SHORT OF EXPECTATIONS; US INVENTORY DATA IN FOCUSYesterday, Brent rose from $78.5/bbl to as high as $82.6/bbl as the strategic oil reserve release that was announced ended up being more modest than markets had expected. The release will end up being around 65 mln bbl (although this excludes China), of which two-thirds needs to be refilled starting next year. This volume is well below some estimates of 100-120 mln bbl over two months (1.7-2.0 mln bpd) that had been circulating. The US has announced two batches: the first one is 32 mln bbl, which is the so called "exchange volume" that will need to be exchanged with, or in other words bought back from the commercial market at a future date. The second batch is the 18 mln bbl that will be an accelerated release from the previously authorized sale by Congress (such sales are conducted frequently to finance the storage facility repairs of the SPR). India has announced a 5 mln bbl SPR release. South Korea, as we understand, is delivering another 5 mln bbl and Japan, with around 4-5 mln, will follow suit. The UK will release 1.5 mln bbl of oil products, but on a "voluntary" basis, as these stocks are held by companies. China, meanwhile, has been drawing down its SPR for some time and will continue to do so. While it is supportive of coordinated action to lower prices, given the worries about domestic inflation, we understand that Beijing will delay confirming a release. China was previously expected to announce another round of auctions of up to 15 mln bbl before year-end, which will also need to be bought back within 90 days.While outright prices might be volatile, the back end of the futures curve in Brent and WTI is likely to move higher on the need to refill inventories in the future. The US Department of Energy has stated that the entire 32 mln bbl "exchange volume" will be made of sour crudes, while the bulk of Asia's SPR will also be sour crudes. This will do little to alleviate the ongoing tightness in sweet crudes and is thus supportive of the currently backwardated futures curve Brent and WTI and should widen the Brent-Dubai spread further. Ultimately, the US-led effort to reduce crude prices in the short run will, all else being equal, end up being a price-supportive factor next year.This morning, Brent is stabilizing and is trading near $82.5/bbl, with API overnight having reported US weekly crude oil (+2.31 mln bbl) and gasoline (+ 0.576 mln bbl) stock builds, while distillates stocks fell (-1.51 mln bbl). Today, investors will primarily eye the weekly EIA update on US inventory levels. We expect a more upbeat report than the one released by the API overnight and think that Brent will likely inch closer to $83/bbl as a result. In our view, high exports and growing domestic consumption from refineries will yield a more upbeat result in the crude oil category, with gasoline demand estimates to remain strong ahead of the Thanksgiving LD CONTINUES TO SLIDE AS US TREASURY YIELDS HEAD NORTH Gold retreated from $1,805/oz to $1,790/oz yesterday, breaking below the key support level at $1,800/oz. The US 10y Treasury yield climbed from 1.63% to 1.67%, while EUR/USD held more or less steady near 1.124 but failed to provide support for bullion. Yesterday's data was mixed for gold. Preliminary IHS PMIs were upbeat in the eurozone (manufacturing 58.6, services 56.6) and close to expectations in the US (manufacturing 59.1, services 57). Demand in the US remains strong, and both PMIs advanced in November on the back of improving new orders, business activity and new projects. For manufacturing, the main problems appear to be with supply chains, high staff turnover and hiring challenges. On the services side, the positive picture is being clouded by inflationary pressure and rising wages. Despite the positive picture on the demand side, price rises have begun to affect economic indicators over the past month, which could herald more rapid Fed tightening to curb further inflationary pressure.Gold is trading near $1,795/oz as we write. Today, the market awaits US PCE inflation for October, the FOMC minutes, durable goods orders, wholesale inventories, personal income and spending (all for October), the second reading of US GDP for 3Q21, and weekly initial jobless claims. PCE inflation is expected to reach 0.7% m-o-m and 5.1% y-o-y, which is quite possible given the CPI and PPI have both increased this month. The other releases are expected to show improvements, which could pressure gold as the Fed would likely signal more aggressive monetary policy tightening on the back of a strong economic recovery. We expect bullion to retest support at $1,780/oz SE METALS MOVE SLIGHTLY LOWER; COAL BACK ON THE RISE, FOLLOWING GAS PRICES HIGHERYesterday, base metals mostly closed in the red. Three-month LME contracts on copper edged down 0.16% (-$16/tonne from the previous day's close) to $9,711/tonne, aluminum dropped 0.78% (-$21/tonne) to $2,669/tonne and zinc fell 1.42% (-$48/tonne) to $3,301/tonne, while nickel was almost flat at $20,349/tonne.The relatively modest declines came as investors weighed US data pointing to a slowing recovery. However, with fundamentals remaining tight for the vast majority of base metals, prices are likely to remain at elevated levels in the near future. We think investors will start pricing in their expectations for the upcoming Fed meeting soon. When the Fed officially turns hawkish and the dollar appreciates, this is likely to drive all dollar-denominated commodity prices lower. However, as this year has shown us, there will be outperformers - the commodities with the tightest fundamentals. We expect aluminum to be one of them, given the global market deficits of 1.5 mt and 2.5 mt projected for this year and next, respectively. Copper might also outperform given how low inventories have been, but a pickup in mining activity in Latin America and Congo is likely to bring the market into a more balanced state closer to the end of 2022.Global coal futures are on the rise, chasing natural gas quotes higher. We expect the situation in the gas market (which right now is all about politics) to remain the key driver for coal prices in the months to come. Notably, Chinese coal futures continue to lag, which is attributable to the conditions and regulations in the domestic market. However, the weather is becoming a major factor in China with the La Nina phenomenon seen as a threat to fuel supplies this winter. Although coal inventories in China have recovered somewhat from the record lows seen in September and October, there are concerns that the country's coal imports could drop in November and December, as imported coal has become uneconomical with domestic prices now capped. However, the recent clearance of an around 2.8 mt shipment of Australian coal that had been stranded at Chinese ports for almost a year suggests that more Australian coal might be on the way. Regardless, politics will remain the main driver for coal prices across the globe this