Commodities. Oil and Gold Daily - August 15, 2017

> Oil prices fall as Chinese refining and US production figures digested. After trading near $52/bbl early in the day yesterday and later rising to as high as $52.3/bbl at midday, Brent for October delivery started to retreat and eventually settled at $50.73/bbl, down $1.37/bbl on the day. In yesterday's daily we wrote that a slowdown in Chinese refining activity in July, data for which was due out yesterday morning, would combine with a rise in drilling in the US, as reported in the latest EIA report, due out later in the day, to cap any price gains early this week; in fact, they not only did this, but pushed prices lower yesterday. The EIA report suggests that US tight oil production will increase sharply in September. The EIA would have expected it to rise 0.106 mln bpd m-o-m to 5.69 mln bpd in September (total US production stands at 9.42 mln bpd, according to the EIA inventory report for the week to August 4), but it made some changes to its methodology for the latest report, adding the Anadarko Basin and merging the Marcellus and Utica Basins into the Appalachian Basin. These changes pushed its expected m-o-m production increase for September up by an extra 0.117 mln bpd to 6.15 mln bpd. This suggests that the EIA now expects production to reach 6.03 mln bpd in August. The extra production is expected to be driven by increased drilling in Texas, where the Permian Basin is expected to contribute 0.064 mln bpd to the increase (to 2.6 mln bpd) and the Eagle Ford region 0.014 mln bpd (to 1.39 mln bpd). Elsewhere, Bakken is expected to add 0.01 mln bpd to the gains (to 0.645 mln bpd). In our view, the EIA's revised forecast is very likely to materialize next month and, combined with lower refining activity, will pressure inventory draws. Still, decreased imports from the Middle East on the back of the OPEC-led production cut deal, as well as stronger US exports, should keep stocks falling, but at a slower rate.
> CFTC data continues to show bullish change in oil sentiment. CFTC data for the week ending August 8, when Brent was trading sideways in a range of $51.3-52.8/bbl, showed that hedge funds' long positions in WTI and Brent futures and options had increased by 38 mln bbl contracts to 873 mln bbl. This marks the second week in a row of large gains in long positions. The data also showed a decrease in short positions for the sixth week in a row: shorts decreased by 17 mln bbl contracts to 168 mln bbl. The last time the volume of shorts was this low was in mid-April, when Brent was trading near $55/bbl (the amount of long contracts then, however, outnumbered the current amount by 70 mln bbl contracts). We think that the cautious bullish shift we have seen since late July has been driven by signs of improved market fundamentals, such as stronger calendar spreads. In our view, the only factor that could have encouraged a further buildup in longs and driven prices higher - a sharp decline in US crude and refined product stockpiles - is in doubt for the time being because the sharp increase in gasoline imports reported last week could lead to an inventory build down the road. A break above $53/bbl, which was seen as recently as late last week, is still in the cards this month, but this price is now looking more like a peak for front-month Brent this summer.
> Gold prices continue to fall; CFTC data suggests profit-taking a factor. Gold has continued to fall this week and was trading near $1,275/oz this morning, around $15/oz below where it was late last week. Tensions between the US and North Korea remain elevated after Pyongyang published its plans for a potential missile strike on the island of Guam, though leader Kim Jong Un has since backed off from these threats, stating that he would wait for the US to act first. The US, meanwhile, has indicated that it is ready to intercept a North Korean missile if launched. It now looks like the sides have reached a stalemate and that neither is willing to take another step toward direct military conflict. This has sparked an outflow of money from haven assets, driving gold into retreat amid a recovery in the dollar and US Treasury yields. Another factor that has been contributing to gold's decline, in our view, is profit-taking. CFTC data for the week to August 8 (the week before the conflict began to escalate) indicated that hedge funds added to their long positions in gold for the fourth week in a row while substantially reducing their short positioning for the third week running. Given that gold prices increased by around $30/oz from August 8 to August 11, we suspect that many money managers have opted to lock in their profits this week, accelerating the decline in prices. We see strong support for gold at $1,260/oz, a level last seen on August 8, before the US-North Korea conflict started to heat up.