Commodities. Oil and Gold Daily - August 29, 2017

> Strongest floods from Harvey yet to come, oil prices pressured. Brent for October delivery, after hovering above $52.5/bbl during the first half of the day yesterday, slid to an intraday low of $51.55/bbl midday. It eventually settled at $51.89/bbl, down $0.52/bbl on the day. This morning, Brent started out just above $52/bbl, helped by supply disruptions in Libya, which we wrote about yesterday, and an attack on a 0.21 mln bpd oil pipeline in Colombia that caused it to shut down. Hurricane Harvey, however, remains the focus of the market: the rain and flooding continue to force refineries offline, undermining crude demand and exerting more and more pressure on prices. The storm is expected to linger near the Texas Gulf Coast for another few days, approaching Houston on Wednesday, with the strongest flooding yet expected on Wednesday night and Thursday.
The latest official data shows that, as of Monday evening, Gulf Coast offshore crude production (1.75 mln bpd) has started to recover, albeit slowly. Still, 19% remains offline, 3% more than on Sunday evening. Refiners, on the other hand, are closing capacity by the day: almost 2.45 mln bpd of the 18.6 mln bpd of total US refining capacity is currently shut, compared with a little above 2 mln bpd as of yesterday. Given the rather negative weather forecast for this week, we think that the downstream sector will continue to see capacity losses in Texas (with a total capacity of 5.6 mln bpd) and Louisiana (3.3 mln bpd). The net effect will be negative for prices this week, and we expect Brent to retreat toward $51/bbl. We note that the US inventory data that will be released this week is for the week ending August 25, so it will only reflect initial preparations for Harvey.
> Investors buy up gold after North Korean missile launch. Early in the day yesterday, gold slowly rose toward the key resistance level of $1,300/oz, which it had failed to break on numerous occasions this year; it surged all the way to $1,310/oz later on and has risen to $1,320/oz this morning. Yesterday's gains were driven by a weaker DXY index, which was pressured by gains in the euro following the lack of a response by ECB head Mario Draghi at the Jackson Hole conference to the euro's recent rise.
But today, gold's major source of support is the unprecedented level of geopolitical uncertainty surrounding North Korea after it fired another ballistic missile - this time over Japan - in response to ongoing US-South Korean military exercises. North Korea had previously called the exercises a "reckless provocation" that could result in a nuclear conflict, while South Korea's president said that they were defensive in nature. Japanese Prime Minister Shinzo Abe stated that North Korea's action showed the existence of a "great threat" to Japan. The South Korean foreign ministry has stated that there will be a "strong" joint response with the US if launches continue. The UN Security Council is set to meet later today to evaluate the situation. The latest launch suggests that North Korea was not intimidated by Donald Trump's previous "fire and fury" threat and is ready to take the conflict to the verge of direct military confrontation. This has resulted in investors' fleeing to safe-haven assets. After these latest geopolitical developments, gold could build up enough momentum to test its $1,340/oz resistance level later in the week.