Commodities. Oil and Gold Daily - August 3, 2017

> Mixed EIA inventory report forces sideways trading. Brent for October settlement inched up $0.6/bbl to $51.9/bbl yesterday ahead of the EIA data release but immediately slipped back $0.5/bbl to $51.4/bbl once the data came out. It did not stay below $52/bbl for long and eventually settled at $52.36/bbl, up $0.58/bbl on the day. The EIA reported a 1.5 mln bbl draw in US crude inventories to 481.8 mln bbl in the week to July 28, compared with Bloomberg's median estimate of a 3.1 mln bbl decline and the 1.8 mln bbl gain to 488.8 mln bbl reported by the API the day before, taking the gap between the two to 7 mln bbl. The major contributor to the drawdown was a strong 0.21 mln bpd increase in domestic refining inputs to a record high of 17.41 mln bpd, driven by strengthening demand for refined products, with peak season likely to last for the rest of the summer prior to seasonal maintenance in the autumn. The rest of the data was not as supportive, with exports falling 0.33 mln bpd to 0.7 mln bpd and US domestic crude oil production edging up 0.02 mln bpd to 9.43 mln bpd despite seasonal maintenance in Alaska. However, a further increase in crude oil imports was a major bearish development. They have increased 0.64 mln bpd since the beginning of July, with the latest w-o-w gain of 0.21 mln bpd pushing the total to 8.25 mln bpd. Imports are being driven higher by Saudi Arabia and Iraq, somewhat undermining promises made by the Saudi oil minister, who has pledged a "measured" decrease in exports to the US.
By contrast, refined products provided oil bulls with a lot more cheer, as gasoline stocks fell for a seventh week in a row, this time by 2.52 mln bbl w-o-w, compared with the Bloomberg median estimate of a 1 mln bbl decline and below the 4.8 mln bbl increase reported by the API the day before. In y-o-y terms, total US gasoline stocks remained 10 mln bbl lower, while demand reached a record high of 9.84 mln bpd. Distillate inventories fell 0.15 mln bbl, versus the Bloomberg estimate of a 0.9 mln bbl decrease, while the API had reported a 1.2 mln bbl draw.
In our view, yesterday's report had all the components for Brent to break through $53/bbl and induce a strong dose of bullish sentiment, but the US import/export balance kept prices on hold at $52/bbl. OPEC finally has market fundamentals going its way, with very strong demand (not seen in June) pushing the market towards rebalancing. US inventories could be witnessing a significant draw if only Saudi Arabia and Iraq could lower exports to the US in line with promises and market expectations. Imports from Saudi Arabia are currently running at 1.17 mln bpd, above the annual average, and the cartel leader has very little time to cut this number to induce rebalancing in the US. The clock is ticking, as US refinery inputs will start to come down in September and this perfect opportunity will be lost. Should Iraq and the Saudis deliver lower supplies over the next few weeks, a month-long price rally would definitely be in the cards.
> Gold prices forced to retreat on strong Dow and DXY rebound. Gold experienced a choppy trading session yesterday, with prices bouncing within the $1,263-1,273/oz range. More importantly, the price has slid $12/oz to $1,261/oz this morning from yesterday's intraday high of $1,273/oz reached late in the session. This slide has coincided with a rebound in the dollar index and the Dow Jones Industrial Average reaching another record high of 22,000 this morning, meaning that investors currently favor riskier assets. Yesterday's US private payroll data was relatively strong, especially in light of an upward revision to the June figure showing that private employers added 191,000 jobs and not 158,000 as reported previously, providing decent support to the dollar. All eyes will now be on the US unemployment rate for July, which will be published on Friday and could overturn the bearish sentiment around the dollar and pressure gold further should it exceed the projected 4.3%. For today, however, we expect gold to return to the $1,265-1,270/oz range on weaker than expected initial jobless claims data at 15:30 Moscow time (consensus is 243,000), which would undermine the DXY gains seen this morning.