Commodities Daily - October 12, 2021

> Oil prices stabilize after rising to YTD highs. In our view, today Brent should revisit yesterday's high of $84.6/bbl, though further gains are unlikely amid a lack of fundamental catalysts.> Gold steady amid holiday in US. Gold traded near $1,755/oz yesterday, while the 10y Treasury yield was unchanged at 1.61%. Bullion is trading near $1,760/oz as we write. Today, the market awaits US NFIB small business optimism index for September, JOLTS job openings for August and eurozone ZEW economic sentiment survey for October. We expect bullion to remain range-bound in the $1,745-1,775/oz corridor today.> Base metals mostly in positive territory, with aluminum at a 13-year high. Base metals mostly traded higher yesterday, still supported by a pickup in demand from China following the country's week-long holiday. Aluminum hit a 13-year high, as the power crisis continued to exert cost pressure on the energy-intensive aluminum industry. Meanwhile, the four-day rally in iron ore futures has come to a halt amid growing concerns over the outlook for Chinese demand. OIL PRICES STABILIZE AFTER RISING TO YTD HIGHSYesterday, Brent rallied $2/bbl to a YTD high of $84.60/bbl as markets are tightening ahead of winter. The benchmark eventually settled at $83.65/bbl, $1.26/bbl above the previous settlement. The key question now is whether Brent can revisit the 2018 high of $86.40/bbl. Recall that back then it crashed below $60/bbl in just two months, though we think that such a strong correction is unlikely as speculation in the market is still low. Even if the latest data is incorporated, which shows a small uptick in long positioning in both WTI and Brent, net speculative capital deployed in the crude space is still $35 bln lower than the peak seen in 2018, $25 bln below 2014 and $15 bln below late 2019. Thus, we conclude that long positioning is not stretched, so the size and duration of any price pullback from here should be limited.Moreover, in 2018 a number of traders were long oil (WTI) and short gas (Henry Hub), expecting the spread to widen amid forecasts for a warm winter and higher US gas production as the US had vowed to drive Iranian crude exports to zero. In November 2018, seeking to avoid an oil market shortage, Saudi Arabia surged production to 11.1 mln bpd, only to put most of that oil into its own storage when Trump's Iranian rhetoric did not materialize; the warm winter did not play out either, and hedge funds that specialized in commodity options had to close out their long oil positions, triggering a cascading unravelling of long positions. Currently, market positioning is skewed toward long gas (TTF) in Europe and, in the case of the oil/gas spread trade, short oil (Brent). OPEC+ is also in a different place today. It does not want to raise production by more than planned only to have to pull it back later if the current market tightness proves transitory ahead of possible inventory builds in 1Q22. For OPEC+ to change course, in our view, Brent would have to either stay above the $80/bbl mark for a while or spike. The Biden administration (while also keen to keep gasoline prices lower) is also more predictable than the Trump White House, and as prices rise we would expect Washington to lean more heavily on the Saudis over the coming weeks to raise production (with media headlines increasing as well). The final difference between 2018 and now is US production, which hovered around 11.3 mln bpd in March-July, while we expect it to end the year at 11.4 mln bpd. Back in 2018, production was 1 mln bpd higher in 4Q18 versus 1Q18, and by the time US production growth picks up in 2022, we expect global oil demand to be higher by 1.5 mln bpd. Thus, we think only a sharp demand pullback can now stop prices from rising toward the 2018 high of $86.40/bbl (we expect the mark to be hit before the month-end).This morning, Brent dipped below $84/bbl amid a stock market correction on concerns about elevated inflation, stoked by energy costs. Investors today are eyeing the ZEW eurozone October economic sentiment index, while a raft of oil market fundamental data will be released tomorrow. In our view, today Brent should revisit yesterday's high of $84.6/bbl, though further gains are unlikely amid a lack of fundamental catalysts. Such catalysts could come from the data releases that have been moved to later this week due to the US holiday LD STEADY AMID HOLIDAY IN US Gold traded near $1,755/oz yesterday, while the 10y US Treasury yield was unchanged at 1.61%. EUR/USD slid from 1.157 to 1.155, thus weighing on sentiment for bullion. The macroeconomic calendar was sparse yesterday due to the federal holiday in the US. Pandemic fears in the US are decreasing as new daily cases have been hovering slightly below 90k. That boosts confidence that the economic recovery in the US in October will be stronger than in September, when the resurgent virus dampened the economy, especially the labor market. On the other hand, markets are concerned about rising inflation, as industrial commodity prices have surged in recent days. Tomorrow, investors will be focused on the US CPI statistics, which will likely come in above the 0.3% consensus on the back of rising energy prices. During Asian trading, today gold has advanced slightly to $1,760/oz, as Evergrande Group missed another bound coupon payment, which has intensified investor fears over possible default of the developer and ability of other developer companies to carry debt payment obligations. Today, the market awaits the US NFIB small business optimism index for September, JOLTS job openings for August and eurozone ZEW economic sentiment survey for October. The consensus for the NFIB small business optimism index is 99.5 points, below the 100.1 reading in August. The consensus for job openings in August is 10.954 mln new vacancies, similar to what we saw in July, although given the weak nonfarm payroll data in August (only 366k new jobs), we may see a more upbeat print. We expect bullion to remain range-bound in the $1,745-1,775/oz corridor SE METALS MOSTLY IN POSITIVE TERRITORY, WITH ALUMINUM AT A 13-YEAR HIGHYesterday, base metals mostly closed in the green. Three-month LME contracts on copper added 1.92% (+$180/tonne from the previous day's close) to settle at $9,528/tonne, aluminum surged 2.96% (+$88/tonne) to $3,049/tonne, zinc climbed 1.79% (+$57/tonne) to settle at $3,222/tonne and nickel closed almost flat at $19,168/tonne.Base metals continued their rally on renewed demand from China following the country's return from a week-long national holiday. Aluminum jumped to $3,073/tonne in the afternoon, its highest level since 2008, as the deepening power crisis fueled worries over the supply of the energy-intensive metal. In addition, the European Union imposed an anti-dumping duty on flat-rolled aluminum from China, which only added fuel to yesterday's rally. The Chinese State Council announced on Friday that it would allow higher electricity prices in order to ease the power crunch, which could alleviate the tightness in the aluminum market but could also lead to higher prices given the likely rise in costs. With demand for aluminum still strong, and given the 1 mln global market deficit projected for both this year and 2022, aluminum quotes are likely to remain at elevated levels. They will also be driven by how the power crisis plays out.Today, iron ore is leading a charge downward across the base metals space, with futures in Singapore down around 7% to $126/tonne, as China's intention to cut steel output this year will curtail demand for the metal. While some experts claim steel output might increase in October and November (as some steel mills achieved deeper than expected production cuts in September and profitability is increasing), with the deadline for output cuts having been brought forward to November and with the Winter Olympics around the corner, we think we are likely to see further pressure on demand for iron ore. With that in mind, we think iron ore prices are likely to further