Commodities. Oil and Gold Daily - August 1, 2017

> CFTC positioning suggests further price gains will be difficult. The new front-month October Brent contract was trading $0.4/bbl lower than the expiring September contract yesterday, with both retreating during the day but October futures falling to as low as $51.8/bbl, down by $0.7/bbl from its intraday high. The front-month rollover pushed the October contract higher and it eventually settled at $52.72/bbl , up $0.5/bbl on the day.
The latest CFTC report for the week to July 25 showed that hedge fund short positions in WTI and Brent futures and options have now fallen for four weeks in a row while long positions have remained stable for five weeks. This implies that the recent oil price gains have been caused by short covering, with hedge funds lacking confidence that prices will move higher and therefore not building up longs. The current total volume of short positions is low enough for us to assume that short covering is nearly over and will not support prices further. From now on, for prices to rise, hedge funds will need to start building longs; however, we do not think that there have been enough bullish market developments to fuel such a move. From an oil market perspective, US sanctions against Venezuela appear symbolic so far (though more stringent options remain open), while compliance with the OPEC production cut deal is becoming more of an issue, undermining confidence in the market rebalancing. The only factor that could inject the market with bullish sentiment is the weekly US inventory data: a continuation of the recent sharp drop could snap hedge funds out of their indecision.
> Lower production cut deal compliance to be addressed on August 7-8. At its last meeting on July 24, the OPEC-Non-OPEC Joint Ministerial Monitoring Committee instructed the Joint Technical Committee to investigate weak compliance to the production cuts to determine how to increase conformity and accelerate the market rebalancing. This became an issue in mid-July after the OPEC Secretariat and the IEA reported falling compliance among OPEC members. OPEC reported 110% compliance in May but 95% in June, while the IEA estimated 95% compliance in May and 78% in June. Reuters published its monthly survey yesterday showing total OPEC production up 0.09 mln bpd at 33 mln bpd, with a compliance rate at just 84% in July compared with 90% in previous months. A technical meeting will take place in Abu Dhabi on August 7-8 with the full list of attendants yet to be confirmed. We do not expect the meeting to cause major price shifts at the time of the event, but over the longer run it might induce better compliance. Discussions are likely to be limited to the accuracy of assessments by secondary sources (which OPEC uses to monitor compliance) rather than self-reported figures.
> Gold in $1,265-1,270/oz range; further break above $1,270/oz eyed. After breaking above $1,270/oz early yesterday, the gold price consolidated in the $1,265-1,270/oz range, torn between a falling dollar index and rising 10y US Treasury yields. US political turmoil continues, with John F. Kelly, President Trump's new chief of staff, firing the recently appointed communications director, Anthony Scaramucci following the latter's rant against his new colleagues. US nonfarm payrolls data could bolster the dollar but will not be out until Friday, so for now we think there is little to prevent it from falling lower and pushing gold higher to the $1,270-1.275/oz range. Recent tension between US and China over North Korea, coupled with the slump in US-Russian relations over new sanctions will also provide major support.