Commodities Daily - October 20, 2021

> Oil prices seesaw ahead of EIA inventory report. Brent is under pressure this morning, trading near $84.5/bbl after the API reported yet another crude oil stock build and draws in gasoline and distillates stocks. Today, investors are eyeing the start of the India Energy Forum, which will feature many prominent speakers. Also, the Fed Beige book and weekly EIA inventory update are due. In our view, what is likely to be a mixed EIA report is unlikely to provide strong price support to oil. We see Brent likely ending the day within the current $84-85/bbl range.> Gold edges higher as US data comes in worse than expected. Gold edged up from $1,765/oz to $1,770/oz yesterday while the 10y US Treasury yield rose from 1.60% to 1.64%. Today, it is trading near $1,775/oz as we write. Today, the market awaits a final reading of the EU CPI for September and the Fed Beige book. We expect bullion to remain bound in a $1,755-1,780/oz corridor today.> Metals plunge as China intervenes in coal market. Base metals pushed lower yesterday, and the losses extended into today, after Chinese authorities announced measures to rein in coal prices. In the copper market, the LME is also trying to restore order after a massive stock draw drove the market into drastic backwardation.OIL PRICES SEESAW AHEAD OF EIA INVENTORY REPORTBrent endured a choppy session yesterday, trading within a $83.7-85.4/bbl range. It reached the upper band of this corridor later in the day amid tailwinds from global risk-on sentiment. With strong earnings lifting sentiment, the S&P 500 posted its fifth straight session of gains. Brent eventually settled at $85.08/bbl, fixing $0.75/bbl above the previous settlement. Investors, meanwhile, continue to eye developments in the natural gas market: prices in Europe have stabilized just above $1,000/mcm after peaking at around $1,930/mcm in early October. The surge in gas prices made diesel and fuel oil attractive for power generation, creating upside for oil demand this winter and boosting oil prices in general in September-October. A possible gas price correction is therefore one of the risks that could stall the ongoing oil price rally or even result in a small temporary pullback.Higher Russian supply to Europe compared to September-October levels - possibly via Nord Stream 2 or by negotiating new long-term contracts via other supply routes - is seen as the key downside factor for gas prices. The latest Bloomberg report notes that Russia is signaling that it won't go out of its way to offer European consumers extra gas to ease the current energy crisis unless it gets something in return, such as regulatory approval from Germany and the EU to start shipments through Nord Stream 2. We think there will likely be some sort of consensus reached that will result in higher gas shipments to Europe by the end of this year.This morning, Brent is under pressure and is trading near $84.5/bbl after the API reported yet another crude oil stock build (+3.29 mln bbl) but draws in gasoline (-3.5 mln bbl) and distillates (-3 mln bbl). Today, investors are eyeing the start of the India Energy Forum, which will feature many prominent speakers. Also, the Fed Beige book and weekly EIA inventory update are due. In our view, what is likely to be a mixed EIA report is unlikely to provide strong price support to oil. We see Brent likely ending the day within the current $84-85/bbl range. Also worth noting is that at least one technical indicator is signaling that oil is due for a pullback: the 14-day Relative Strength Index for Brent is flirting with the 70 mark, a level that signals that crude is LD EDGES HIGHER AS US DATA COMES IN WORSE THAN EXPECTEDGold edged up from $1,765/oz to $1,770/oz yesterday while the 10y US Treasury yield rose from 1.60% to 1.64%. Meanwhile, EUR/USD gained from 1.161 to 1.163, which created tailwinds for bullion. In addition, US economic data supported gold. US housing starts in September showed a 1.6% decline versus only a 0.2% decrease expected, while US building permits fell 7.7% in September versus the consensus for only a 2.4% decrease. Overall, the data showed more signs of weakness in the US economic recovery in September and supported hopes for a dovish Fed at the upcoming November 2-3 meeting. However, comments from Fed officials were less supportive for bullion. In particular, Fed Governor Christopher Waller said: "while there is still room to improve on the employment leg of our mandate, I believe we have made enough progress such that tapering of our asset purchases should commence following our next meeting." But he added the caveat that "if my upside risk for inflation comes to pass, with inflation considerably above 2% well into 2022, then I will favor liftoff sooner than I now anticipate." Meanwhile, Richmond Fed President Thomas Barkin said that labor shortages were forcing employers to boost wages, especially for lower-paid workers, and adjusting their requirements and benefits.During the Asian trading session today, gold rose to $1,775/oz. Today, the market awaits a final reading of the EU CPI for September and the Fed Beige book. In addition, we would highlight a speech by Fed Vice Chairman Randal Quarles, which could give us further clues on the November decision. We expect bullion to remain bound in a $1,755-1,780/oz corridor TALS PLUNGE AS CHINA INTERVENES IN COAL MARKETYesterday, base metals closed in the red, with nickel an exception. The 3m LME contract for copper lost 0.46% (-$46/tonne from the previous day's close) to $10,150/tonne, aluminum edged down 1.75% (-$56/tonne) to $3,112/tonne, nickel edged up 0.27% (+$53/tonne) to $20,050/tonne and zinc plunged 5.10% (-$189/tonne) to $3,508/tonne.Base metals markets finally turned south, pressured by the decision of Chinese authorities to introduce measures aimed at taming the energy crunch in the country, which is pushing commodity prices to new highs and further jeopardizing already-slowing economic growth. The measures include ensuring that coal mines operate at full capacity with a target of at least 12 mtpd of output while also giving coal priority for delivery at ports. This led coal futures to sink 8% on the Zhengzhou Commodity Exchange to $331/tonne today from a record $361/tonne, with the correction starting yesterday. The Chinese authorities are reported to have only just started looking at ways to intervene in the coal market, so we believe more intervention is forthcoming, which will put pressure on coal and all base metals.The reaction of base metals to the news proved negative. Leading the losses were overheated zinc and energy-intensive aluminum. Still, much attention is currently focused on the copper market, as the LME has launched an inquiry into recent trading and announced a set of temporary rule changes. This follows a massive draw that pushed warehouse inventories to a 47-year low last week, which triggered a surge in copper prices and pushed the cash-to-three-month spread to a record $1,000/tonne in just one