Commodities Daily - September 21, 2021

> Oil drops amid selloff in stocks despite tight physical market. This morning, Brent has rebounded above $74.5/bbl, as stock markets have begun to recover and Royal Dutch Shell has announced that production at two of its largest Gulf of Mexico fields will not resume until next year due to the damage from Hurricane Ida. Today, investors will eye US August housing starts, and then the API's weekly US oil and refined product inventory data overnight. In our view, the latter release could help Brent to end the day above $75/bbl, as it could remind investors of how strong the physical market is.> Gold advances amid global stock market worries. Gold climbed from $1,755/oz to $1,765/oz yesterday, while the US 10y Treasury yield dropped from 1.36% to 1.30%. Gold is trading near $1,760/oz as we write. Today, the market awaits US building permits and housing starts for August. We expect bullion to remain range-bound at $1,750-1,775/oz today.> Metals plunge further, copper plunges but remains resilient on strong fundamentals. Base metals continue to fall on risk-off sentiment amid the Evergrande saga and upcoming Fed meeting. Copper fell to a one-month low and is flirting with a strong support level, yet is backed by solid fundamentals.OIL DROPS AMID SELLOFF IN STOCKS DESPITE TIGHT PHYSICAL MARKETYesterday, Brent slid $1.9/bbl to as low as $73.5/bbl amid a decline in global stock markets as worries mounted over the possible implosion of the Chinese property sector with real estate developer Evergrande seemingly on the verge of default. These concerns were only compounded by the typical caution displayed by investors as the Fed meeting drew nearer. Front-month Brent eventually settled at $73.92/bbl, fixing $1.4/bbl below the previous settlement. The drop in oil prices came despite a persisting deficit in the physical market and falling inventories. For example, oil and refined product stocks had fallen by around 300 mln bbl YTD by the end of 1H21, and by the end of the year they will be lower still, as the incoming 3Q21 data shows that stocks have continued to rapidly decline. Moreover, OECD crude and product stockpiles were at the lowest in five years as of end-August, not merely below the 2015-19 average.In our view, the recent oil price rally (prior to yesterday's selloff) would have been even stronger had it not been for strategic petroleum reserve releases by both China and the US. The Biden administration has been explicit about wanting lower gasoline prices and has front-loaded SPR releases to temper price growth. It is important to highlight that the first Chinese SPR release was modest (7.3 mln bbl), and that the total volume auctioned off by the end of June 2022 is likely to be less than 50 mln bbl. Even more important to note is that Chinese state majors will eventually need to refill the country's SPR as demand recovers. While the recent rise in Delta cases in Fujian could lead to some localized lockdowns, the government is confident it can control the outbreak, thus limiting the impact on fuel demand.With the "reflation trade" in most commodities having been put on hold, crude has been the clear outperformer. With several technical resistance levels for Brent near the current price levels and fears of SPR releases still looming, the question is whether crude can ascend to new highs this year. We believe it can, aided by a stronger physical market, which is getting a boost from Chinese buying and stronger global refining margins. We think late September-early October would be as good a time as any for Brent to test its YTD high of $77.8/bbl, though the Fed meeting this week could provide a negative surprise, challenging the fundamentally driven upswing in prices. This morning, Brent has rebounded above $74.5/bbl, as stock markets have begun to recover and Royal Dutch Shell has announced that production at two of its largest Gulf of Mexico fields will not resume until next year due to the damage from Hurricane Ida. Today, investors will eye US August housing starts, and then API's weekly US oil and refined product inventory data overnight. In our view, the latter release could help Brent to end the day above $75/bbl, as it could remind investors of how strong the physical market LD ADVANCES AMID GLOBAL STOCK MARKET WORRIESGold increased from $1,755/oz to $1,765/oz yesterday while the US 10y Treasury yield fell from 1.36% to 1.30%. EUR/USD held steady near 1.173, limiting gold's volatility. The US NHAB housing market index for September came in at 76 points, above the consensus of 74 and the August reading of 75. This caused concerns that we might see more hawkish views at the upcoming FOMC meeting. However, gold demonstrated positive momentum as one of China's largest developers, Evergrande Group, is facing a debt crisis, which caused a global selloff on stock markets yesterday. The S&P 500 dropped by the most in nearly five months, while other stock markets lost 1.7% on average. This caused increased interest in safe-haven assets such as US Treasury bonds and gold, which made gains as the 10y Treasury yield slid. Former New York Fed President William Dudley said the Evergrande situation is unlikely to delay the Fed's tapering signals or hinder it from monetary policy tightening.Gold is trading near $1,760/oz level as we write. Today, the market awaits the start to the FOMC meeting, which will likely provide headwinds for bullion. The OECD will also publish its interim economic outlook, while we will also see US building permits and housing starts for August. The consensus is calling for a 1.8% decrease in building permits and 1% rise in housing starts. We expect bullion to remain range-bound at $1,750-1,775/oz TALS PLUNGE FURTHER, COPPER PLUNGES BUT REMAINS RESILIENT ON STRONG FUNDAMENTALSBase metals closed in the red yesterday. Three-month LME contracts on copper plunged 2.72% (-$251 from the previous day's close) to settle at $9,013/tonne, aluminum edged down 0.37% (-$11) to $2,862/tonne, nickel was down 2.26% (-$437) $18,953/tonne, while zinc dropped 1.77% (-$55) to settle at $3,013/tonne.The risk-off sentiment remained in place as global markets grappled with fears about the potential implications of the Evergrande collapse for the Chinese property market and the economy as a whole. Other areas of concern include there being no clear path to raise the debt ceiling in the US and the upcoming Fed meeting.Copper plunged to a one-month low toward support at the 200-day moving average, a level that proved sturdy back in August. However, the data shows that a deficit in copper remains in place this year, with inventories in Shanghai close to historical lows, which is allowing copper to remain relatively resilient to the general negative sentiment and risk-off mood. How things play out in the coming days will largely be determined by the rhetoric at tomorrow's Fed meeting. The recent plunge in stock markets and investors' negative sentiment might force the Fed to somehow calm markets. If this does transpire, copper might bounce back to the corridor that it had been hovering in since mid-June. However, a shift by the Fed to a more hawkish stance (which we now see as less probable) would reinforce the