Commodities. Oil and Gold Daily - August 18, 2017

> Brent moves further above $50/bbl, widening gap to WTI. The Brent October contract came close to falling below key support at $50/bbl yesterday, reaching an intraday low of $50.02/bbl mid-day. However, it managed to rebound from this level to close at $51.03/bbl, up $0.76/bbl on the day. The move in Brent was not matched by a commensurate rise in the front-month WTI contract, so the gap between the two expanded to almost $4/bbl, well above the $2.00-3.50/bbl range from earlier this year and a level not seen since February 2016. The move in Brent occurred at the New York open on the day after EIA inventory data showed crude inventories at the Cushing delivery hub for WTI increasing by 0.678 mln bbl in the week to August 11, following a 0.569 mln bbl increase in the week to August 4. These were the first inventory gains at Cushing since mid-April. The abundance of WTI could eventually result in wider differentials to other benchmark grades.
WTI differentials are affected by seasonal changes, as the refineries that feed off of oil from Cushing (especially the ones in the PADD 2 region) exhibit strong seasonality due to maintenance, impacting oil consumption and inventory levels. Refinery turnarounds in PADD 2 will substantially increase in October, which should lead to a sharp inventory buildup at Cushing, further pressuring the WTI differentials. We, however, do not think that a substantial weakening in WTI prices in 4Q17 is a given, as wider differentials make US crude more attractive globally (thanks to arbitrage opportunities), with shipments to China, which has become one of the biggest markets for US oil this year, being key. After weakening in 3Q17, we expect Chinese buying to pick up in 4Q17 (deliveries for 4Q are already overbought) to fill the country's strategic reserves and meet demand coming from new refinery start-ups. As a result, we expect US exports in 4Q17 to exceed 1 mln bpd, constraining the inventory buildup in the US.
> Gold headed toward $1,300/oz on Fed comments, US political uncertainty. For most of the day yesterday, gold was trading sideways in a range of $1,285-1,290/oz. Later in the day, it began pressing toward $1,290/oz as the dollar weakened and Treasury yields fell on comments by Fed officials. Dallas Fed President Robert Kaplan expressed concern over weak price growth and said that he would not support a rate hike until inflation reaches the Fed's 2% target. Meanwhile, Minneapolis Fed President Neel Kashkari stated that he did not think that rate hikes should be hurried.
This morning gold broke above $1,290/oz to trade near $1,295/oz as attention turned to the US and the growing uncertainty surrounding the Trump administration. The president's chief economic advisor Gary Cohn, a key advocate of the planned tax reforms and infrastructure program, was rumored to be considering resignation, which would reduce the chances of these plans materializing. A White House official eventually responded, saying that Cohn "is focused on his responsibilities," but the reports nonetheless continue to rattle markets. Meanwhile, Trump is losing support following his response to the recent violence in Virginia. Given these and other recent developments, we think that gold will come close to breaking resistance at $1,300/oz today.