Commodities Daily - Март 1, 2018

> Oil plummets on bearish EIA inventory report and monthly production data. We expect Brent to stabilize around $65/bbl today, supported by increased buying activity following yesterday's sharp correction and lower OPEC February production estimates by Reuters and Bloomberg. We also think major global indexes will continue to dictate oil prices, especially after yesterday's strong correction.
> Gold slides after steady session yesterday; important US data looming. Our FX team notes today that EUR/USD has strong support at 1.2165, which we think implies a $1,300-1,305/oz range for gold. We do not expect it to fall below $1,300/oz today (after correcting already this morning), but a dip below $1,310/oz is in the cards.


OIL

> Oil plummets on bearish EIA inventory report and monthly production data. The new front-month Brent May contract opened near $66.2/bbl yesterday and started to generate positive momentum, falling just short of the $66.8/bbl mark. Ahead of the EIA inventory data release, it was trading near $66.5/bbl, but the numbers sent it tanking $1.3/bbl to $65.2/bbl. It then clawed back $0.8/bbl before undergoing another sharp correction induced by a sharp retreat in the S&P 500, the Dow Jones Industrial Average and the release of mixed 914 oil production report from the EIA. Brent eventually settled at $64.73/bbl, $1.79/bbl below the previous settlement, and this morning it is hovering above $64.5/bbl. The dollar continued to strengthen yesterday, with EUR/USD eventually retreating from an intraday high of 1.224 to below 1.22, where it continues to trade this morning. The Dow and S&P 500 retreated following the Fed chair's statement and outlook, which increased the chances of faster rate hikes this year than previously assumed. We expect Brent to stabilize around $65/bbl today, supported by increased buying activity following yesterday's sharp correction and lower OPEC February production estimates by Reuters and Bloomberg. We also think major global indexes will continue to dictate oil prices, especially after yesterday's strong correction.
The EIA reported a 3 mln bbl increase in crude stocks to 423.5 mln bbl one day after the API reported a 0.93 mln bbl rise to 421.2 mln bbl. The Bloomberg median consensus had been for a 3 mln bbl build, in line with the actual result. The buildup was mainly driven by a strong weekly decline in exports (by 0.6 mln bpd to 1.4 mln bpd), a surge in imports (by 0.26 mln bpd to 7.28 mln bpd) and a slight drop in refinery inputs (by 0.05 mln bpd to 15.88 mln bpd). Crude oil production was up by a modest 0.013 mln bpd to 10.283 mln bpd. This latest report effectively erased all the bullishness generated by the previous week's release, which had driven Brent $1.6/bbl higher. It is also important to highlight another 1.2 mln bbl weekly crude oil stock draw at Cushing (the price point for WTI), with stocks there falling almost continuously since early November. In our view, total crude stockpiles are likely to continue rising in March, as refining activity will remain subdued, with record high exports unlikely to save the day, in our view, given the shrinking WTI over versus Brent on Cushing stock draws.
There were also some significant bearish takeaways from the refined products category in yesterday's report. Gasoline stocks were up 2.5 mln bbl (versus the median Bloomberg consensus of a 0.6 mln bbl increase), while distillate inventories were down 0.98 mln bbl, close to the consensus call. Total refined product stocks have started to build on the back of declining demand. Total demand for refined products had so far this year been exceptionally high, (averaging 20.7 mln bpd in January, up 1.5 mln bpd y-o-y) but dropped to 19.9 mln bpd last week, up just 0.4 mln bpd y-o-y. If this trend holds, oil prices will come under further pressure in March from stock builds in the refined products category.
Later in the day, the EIA released its 914 oil production report, which showed a 0.02 mln bpd upward revision to 10.057 mln bpd for the November production estimate (compared with the EIA's 9.66 mln bpd figure based on the average of weekly estimates). In December, however, production was down 0.11 mln bpd to 9.95 mln bpd (compared to the EIA's 9.78 mln bpd figure based on the average of weekly estimates).


GOLD

> Gold slides after steady session yesterday; important US data looming. Gold was trading within the $1,315-1,320/oz range yesterday with a bias toward the upper end of the range later in the day and even breaking above the $1,320/oz mark on a couple of brief occasions. This was mainly the result of a surge in the Japanese yen (which like gold is considered a safe-haven investment, meaning that the two have a strong positive correlation), as a drop in equities induced a flight to safety and the BoJ trimmed purchases of long-dated Japanese government bonds. Gold was pulled in opposite directions by a surging dollar and sliding US Treasury yields. This morning, however, it has dipped below $1,315/oz on dollar strength and a weaker yen amid stable US Treasury yields. Our FX tem notes today that the dollar delivered its best monthly performance in February since Trump won the US presidency in late 2016.
Today, investors await US PCE inflation for January at 16:30 Moscow time. This will be crucial, as an uptick to the core measure from the previous month's 1.5% y-o-y would be seized upon by Fed hawks and help to shape faster US rate hike expectations. Personal spending and income data will also be released at 16:30, followed by the ISM manufacturing survey at 18:00. Fed Chair Powell will testify for a second time this week and is likely to soften his previously hawkish rhetoric, though he is unlikely to alter course. Our FX team notes today that EUR/USD has strong support at 1.2165, which we think implies a $1,300-1,305/oz range for gold. We do not expect it to fall below $1,300/oz today (after correcting already this morning), but a dip below $1,310/oz is in the cards.