Commodities. Oil and Gold Daily - August 21, 2017

> Oil prices surge amid tight market and falling US rig count. The Brent October contract ended last week on a positive note, surging by almost $2/bbl around midday from the $51/bbl level seen earlier in the day and eventually settling at $52.72/bbl, up $1.69/bbl on the day. We attribute the midday surge to stronger market fundamentals, as reflected by a further strengthening in calendar spreads resulting in a four-month Brent backwardation, which now ends at the February 2018 contact. The willingness to pay more for oil with closer expiry than for other contracts down the futures curve points to a market deficit, which will in turn force traders to unleash crude from storage to make larger profits on the prompt market.
Friday's Baker Hughes rig count report showed a five-unit decrease to 763 in active oil rigs in the week to August 18, although this did not provide much support for Brent, which by the time of the release had already gained $1.6/bbl on the day. We think the US rig count data remains encouraging for oil bulls in the longer run, as it confirmed the trend of slowing rig additions that began six months ago. The main reason for this trend is that US shale producers have started to optimize costs in an environment of sub $50/bbl WTI prices, with Permian basin breakeven prices averaging just $2/bbl lower than the WTI front-month contract over the past three months. This slowdown is also partly due to a rise in drilling costs in 2Q17, the first quarterly increase since 1Q14, according to data from the US Bureau of Labor Statistics. The rig count is considered an early indicator of production trends, as 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.
Today, market players will follow news from the OPEC+ technical committee meeting in Vienna, which will once again discuss compliance with the production deal. We do not expect the meeting to drive prices today, though we expect front-month Brent to battle the $53/bbl resistance level later today on the stronger market fundamentals and a force majeure event at the Sharara oil field and Zawiya oil terminal in Libya declared by Libyan National Oil Corporation.
> Gold slides after touching $1,300/oz on Friday, but uncertainty still supportive. Gold prices surged $13/oz by midday on Friday to reach a YTD high of $1,300/oz, but this lasted only for a very brief time, with prices eventually retreating to the $1,285-1,290/oz range. Gold proved very sensitive to a small rise in US Treasury yields and the US dollar index driven by the stronger than expected consumer sentiment data from the University of Michigan and news that Donald Trump had fired chief strategist Steve Bannon, which could ease tensions within his cabinet. This morning, the gold price has been moving toward the $1,290/oz mark, with today's joint US-South Korean military exercises putting US-North Korean tension back under the spotlight. We think the geopolitical tension will push gold into the $1,290-1,295/oz range later in the day. This week, investors await speeches from the Fed chair and ECB president on Friday, which might contain with clues on monetary policy and signposts on QE tapering.