Commodities Daily - September 10, 2021

> Oil slides despite upbeat EIA inventory report, as China confirms SPR release. Brent is paring back yesterday's losses as we write and now stands near $72//bbl, with investors today primarily eyeing US August PPI data and the weekly Baker Hughes rig count data. The consensus is calling for a strong US inflation reading, which would likely dent risk tolerance as it would increase the likelihood of the Fed tapering this year. We therefore think Brent is unlikely to climb much beyond its 50-day MA of $72.2/bbl) today.> Gold manages slight gains on slightly hawkish ECB outcome. Gold rose from $1,790/oz to $1,795/oz yesterday, while EUR/USD climbed from 1.181 to 1.183. The ECB announced that it would reduce the pace of its net asset purchases. Gold is trading near $1,800/oz as we write. Today, markets await US PPI for August and wholesale inventories for July. We expect gold to remain range-bound at $1,790-1,810/oz.> Base metal prices rise, aluminum and nickel reach new highs. Base metals responded positively to the surge in Chinese PPI reported yesterday morning, ignoring the potential for policymakers to step in with further measures to rein in commodity prices. Aluminum and nickel, which are trading at decade highs, look vulnerable to further interventions from China.OIL SLIDES DESPITE UPBEAT EIA INVENTORY REPORT, AS CHINA CONFIRMS SPR RELEASEBrent advanced to $73.2/bbl yesterday before retreating to as low as $70.9/bbl as China confirmed the release of crude oil from its strategic petroleum reserves in an unprecedented intervention in the global market. Although no further details were provided, the statement most likely referred to a 20-30 mln bbl release in July-August. Even if this is a new batch, we understand that this would be the last SPR release of the year, and majors will have to refill these volumes at a later date. Chinese spot market buying will continue to pick up in 4Q21, although the State Bureau of Grain and Material Reserves is likely to organize the rotation of crude from the SPR more frequently in future to alleviate pressure on rising raw material prices. China's SPR releases are in line with the trend seen in other raw materials as well. The exact volume of each auction batch for future release is still unknown, but we believe it will likely be in the range of 10-15 mln bbl at most.Meanwhile, the latest EIA inventory data confirmed that Hurricane Ida decimated US crude production, with the overall figure falling by 1.5 mln bpd, the biggest weekly drop in EIA data in nearly four decades. Gasoline stocks dropped a whopping 7.2 mln bbl to the lowest since November 2019 after Ida bludgeoned Louisiana's power grid and forced most of the state's refineries offline. Crude oil inputs at US refineries dropped to the lowest since March, down 1.63 mln bpd to 14.3 mln bpd, with the majority of Louisiana's refineries shut last week following Hurricane Ida. Total refined product demand dropped by 2.87 mln bpd, with gasoline demand being the standout with a slight rise. The majority of the decline came from the "other oils" category, which includes NGLs. On a four-week average, total demand is now at its highest since September 2019, which would imply that US oil demand has completely recovered to pre-Covid levels. However, the demand picture differs from that of two years ago, as the country is using less jet fuel and more diesel and NGLs. Gasoline demand still hasn't completely rebounded either. Despite the decline in crude production and gasoline stockpiles, futures prices were little changed less than an hour after the data came out. Brent eventually settled at $71.45/bbl, down $1.15/bbl on the day.Brent is paring back yesterday's losses as we write and now stands near $72//bbl, with investors today eyeing US August PPI data and the weekly Baker Hughes rig counts. The consensus is calling for a high PPI reading, which would likely dent risk tolerance, as it would increase the likelihood of Fed tapering this year. We therefore think Brent is unlikely to climb much beyond its 50-day MA of $72.2/bbl) today. One supportive factor is that demonstrations have hit most of Libya's major crude terminals over the past few days, alongside threats to disrupt several oil fields, but production remains unaffected for now. We anticipate limited outages but not a coordinated multi-terminal shutdown by military forces, with supply losses possibly reaching 0.2-0.4 mln bpd, though these will likely prove short-lived, in our LD MANAGES SLIGHT GAINS ON SLIGHTLY HAWKISH ECB OUTCOMEGold rose from $1,790/oz to $1,795/oz yesterday, while EUR/USD climbed from 1.181 to 1.183, creating tailwinds for bullion. The 10y US Treasury yield slid from 1.32% to 1.30%. Market participants were focused on the ECB's monetary policy decision yesterday. The ECB mentioned that the eurozone economy had grown faster than expected in 2Q21 (2.2% GDP growth) and that it sees inflation rising from the current 3% this autumn and then declining next year. While interest rates were left unchanged, the policy statement indicated that the eurozone economy is clearly rebounding and that the current economic outlook would allow for a moderately lower pace of net asset purchases. That somewhat hawkish rhetoric supported the euro and thus helped gold climb a bit higher. Meanwhile, US initial jobless claims fell to 310k last week, the lowest since the pandemic began. This further sign of improvement in the US labor market blunted gold's gains yesterday, as did moderately hawkish comments from Fed officials. Fed Governor Michelle Bowman said that the labor market was very close to where it needs to be for the Fed to start tapering QE and that the process will likely begin this year. Atlanta Fed President Raphael Bostic also said that the Fed should be able to start tapering its bond purchases this year, but that the decision was unlikely to be made at this month's FOMC meeting.During this morning's trading in Asia, gold hovered slightly above $1,800/oz. Today, markets await US PPI for August and wholesale inventories for July. The consensus for the PPI print is 0.6% m-o-m. However, China's August PPI reading just came in higher than expected, and it is possible that we will see much of the same with the US reading. In that case, we would likely see gold give back some of its recent gains amid dollar strengthening. We also note that ECB President Christine Lagarde is scheduled to speak. We expect bullion to remain range-bound at $1,790-1,810/oz SE METAL PRICES RISE, ALUMINUM AND NICKEL REACH NEW HIGHSYesterday, base metals closed in the green. Three-month LME contracts on copper rose 1.31% (+$121/tonne from the previous close) to settle at $9,388/tonne, aluminum surged 2.02% to set another record high at $2,836/tonne (+$57/tonne), nickel edged up 2.54% (+$500/tonne) to $20,185/tonne and zinc rose 0.74% (+$22/tonne) to $3,074/tonne.Yesterday's high Chinese PPI reading pushed base metals to new highs rather than fueling concerns that the government could push forward with its measures to tame commodity prices. Aluminum hit another record high, while nickel finally broke through $20,000/tonne, reaching levels not seen since 2014. Both metals continue to benefit from China's crackdown on emissions in energy-intensive industries, while their longer-term outlooks are supported by their role in the green revolution. Although both markets are currently in deficit, the current rally has owed largely to speculation and seems fragile to us, as we think there is a high probability that Chinese authorities will redouble their efforts to quell the surge in prices. This might come via further verbal intervention or higher volumes of metals from state reserves being auctioned off to the market. Since speculative positions have been trending lower in copper and investors' interest has shifted to other markets including aluminum and nickel, the latter two look more vulnerable to potential warnings from