Commodities. Oil and Gold Daily - August 22, 2017

> Oil falls despite severe disruption in Libya. After ending last week on a strong note, nearly breaking through resistance at $53/bbl, Brent for October delivery retreated midday yesterday to below $52/bbl and eventually settled at $51.66/bbl, down $1.06/bbl on the day. This morning, it is paring back some of the losses, trading close to $52/bbl. In our view, it slid yesterday because of profit taking after it had gained $2/bbl on Friday, but the move was rather surprising given that it did not seem to reflect what looks like a very severe and long-term disruption at Libya's major Sharara oil field, which occurred over the weekend.
Developments in Libya are significant for the global market. Until recently, crude production in the country had nearly quadrupled in the last 12 months and it was pumping just over 1 mln bpd. Sharara had been the major source of that growth. Before the latest disruption over the weekend, it had overcome a security-related disruption last week, which was not significant enough to push prices up considerably. But, this time, the pipeline taking oil from the facility has reportedly been blockaded by the Zintan Brigade, the same force that kept it closed from late 2014 to late 2016. Given this, we think that the disruption may last a long time and even expand to oil fields connected to the same pipeline, such as El Feel. Resolving the disruption will come down to negotiations between the government and the Zintan Brigade, the promises made to whom in late 2016, we note, have not been fulfilled. Libyan production has fallen from 1 mln bpd to 0.76 mln bpd recently and, in our view, will likely fall to 0.64 mln bpd if the situation deteriorates further. This would reduce supply and inevitably drive prices higher.
As far as yesterday's OPEC technical committee meeting goes, the key highlight was the Kuwaiti oil minister's statement that OPEC would discuss extending the production cut deal beyond 1Q18 at its November meeting in Vienna.
> Gold struggles to hold above $1,290/oz; CFTC suggests profit taking down the line. Yesterday, gold prices rose throughout the entire day and, in line with our expectations, eventually broke into the $1,290-1,295/oz trading range later in the day. Gold's safe-haven appeal continued to attract investors amid joint US-South Korean military exercises, which put tensions on the Korean peninsula back in the spotlight. North Korea said the exercises were a "reckless" provocation that could end in a nuclear conflict, while South Korea's president said they were defensive in nature. This morning, however, gold started to retreat and is trading around $1,285/oz, giving way to rising US Treasury yields and a rising DXY. In our view, geopolitics will keep gold elevated today, but it will struggle to again break above $1,290/oz later in the day, limited by the strengthening dollar (see today's FX Beat for more on this).
CFTC data for the week to August 15 indicated that hedge funds added to their long positions in gold for the fifth week in a row while substantially reducing their short positioning for the fourth week running. The ratio of long to short positions stood at 11.6 to1, nearly triple this year's previous high. The last time the ratio was this high was in September 2016, and as history has shown, such a severe skew leaves gold vulnerable to a potential sharp correction on profit taking (for example, late in September 2016, the gold price plunged $80/oz).