Commodities. Oil and Gold Daily - August 14, 2017

> Brent inches up to $52/bbl amid rising rig count. After falling to as low as $51.3/bbl midday on Friday, the Brent October contract started to slowly recover, eventually settling at $52.1/bbl, up $0.2/bbl on the day. Friday's Baker Hughes rig count report showed a three-unit rise to 768 in active oil rigs in the week to August 11, although this did not pressure oil prices. Despite looking bearish short-term, we think that the US rig count data remains encouraging for oil bulls in the longer run, as it further confirms the trend of slowing rig additions that began six months ago. The average pace of rig additions has been on a steady downtrend, from 11 in March, 9 in April, 6 in May, 5 in June, 2.5 in July and to now just 1 for the first two weeks of August. The rig count is considered an early indicator of production trends, meaning that a rig added today will start contributing to production growth in about five months. This trend implies that we are in for another five months of US supply growth, no matter where the oil price is headed during the rest of the year. The current slowdown in rig additions will not impact production growth this year. Wood Mackenize and Rystad recently updated their year-end Permian shale play (the major contributor to US shale growth) production growth forecasts, seeing another 0.3 mln bpd of supply being added. Market players will be watching the EIA drilling productivity report, which is due today at 21:00 Moscow time, and will include the agency's forecast for shale production growth for September. Last month, the EIA had expected US tight oil production to increase sharply in August, by 0.112 mln bpd m-o-m to 5.585 mln bpd. We think today's report will likely show a more subdued m-o-m increase but an increase nonetheless, which could pressure prices until US inventories come out in the middle of the week.
> Chinese refinery runs are down in July, spelling trouble for 3Q17 demand. A report came out this morning showing that Chinese refineries had decreased throughput by 0.5 mln bpd m-o-m to 10.71 mln bpd in July. The decrease was mainly attributable to the state-run refiner Sinopec. This came in line with our view expressed last month that the strong Chinese demand seen in 1H17 should not be viewed too optimistically for 3Q17, given that, due to a domestic surplus of motor fuel, China's largest refineries may be obliged to reduce operations in 3Q17, thus inevitably undermining global demand. The latest report indicates that Sinopec has in fact started to address this issue by reducing refinery runs at a time when motor fuel demand is seasonally peaking in hopes that this way the glut can be eliminated more quickly. In our view, this will certainly pressure the physical market further in 3Q17 and, combined with the EIA drilling productivity report, could cap oil price gains early this week and also further in 3Q17. However, if China's motor fuel oversupply does in fact ease in 3Q17, a surge in Chinese refining and imports would definitely follow in 4Q17, which would support market fundamentals and prices at a time when US refineries are shut for maintenance.
> Negative start to the week for gold prices. The US-North Korea situation remains in the spotlight today after Donald Trump issued another warning to Pyongyang over the weekend, claiming that US military solutions were "locked and loaded." Since then, the confrontation has seemingly eased, as the rhetoric has been toned down and no military actions have been taken. In our view, the uncertainty premium currently accounts for as much as $35/oz of the gold price, though this premium is starting to shrink, as gold has fallen $8/oz from the $1,290/oz level seen late on Friday. Price support from geopolitical uncertainty tends to be short-lived and weaken over time. We think that gold will continue to lose ground over most of the week. However, a fall below $1,260/oz (i.e. where gold was trading before the conflict began to escalate) seems unlikely to us, as the weak US CPI data from Friday has reduced the probability of another rate hike this year, which is a fundamentally positive factor for gold.