Commodities. Oil and Gold Daily - August 4, 2017

> Brent retreats, though physical market strength implies further gains. The Brent October contract surged by almost $1/bbl yesterday to an intraday high of $52.84/bbl, but this proved short-lived, and it subsequently retreated to settle at $52.01/bbl, down $0.35/bbl on the day. The price continued to fall post settlement to break below the $52/bbl level, where it is trading this morning. But what is more interesting is the continuing strengthening of market fundamentals as reflected by the strengthening time spreads (the price differential between two contracts) since late July. This has led to a flattening of the futures curve, with the front-month contract at first reaching parity with the second-month contract yesterday and then even overtaking it for a brief time. Prompt market backwardation is a sign of a tight physical market, with narrowing Urals and Dubai physical differentials to Brent supporting this observation.
We think the financial market is not yet fully reflecting the current strength of the physical market, with futures held back by the recent rise in OPEC production, exports and lower compliance with the production cut deal. This means that export volumes now have an edge over pricing in investors' minds, clearly indicating the strengthening of the prompt physical markets. In our view, a sharp drop in Saudi exports in August is definitely in the cards, fueled by an increase in domestic crude demand (crude burn) for power generation, as a recent sharp strengthening in fuel oil crack spreads means that burning crude will be even more popular. Once the market sees lower Saudi exports, the last anchor holding down the financial market will be removed, in our view, leading to a price surge. However, the gains will only last for a few weeks, as prompt market backwardation will unleash more crude from storage, pressuring the differentials, with autumn refinery maintenance delivering a final blow.
> Gold rises on sluggish BoE outlook prior to crucial US employment data. Gold stepped up from the $1,260-1,265/oz range yesterday to trade just below $1,270/oz, where it is trading this morning. The move was mainly fueled by the BoE meeting, which decided to keep rates unchanged, citing sluggish economic forecast and lower expected wage growth. The BoE cut its GDP forecasts from 1.9% to 1.7% for 2017 and from 1.7% to 1.6% for 2018. This immediately led to the pound weakening and a decline in gilt yields, with money escaping to safe-haven assets such as gold. Confusingly, BoE Governor Mark Carney used the statement as well as the press conference to emphasize that rates could be hiked "faster than the markets expect," leaving investors rather puzzled and capping further gold price gains, in our view.
The market will be eagerly awaiting the US nonfarm payroll report for July at 15:30 Moscow time today. Strong employment is one of the data points supporting one more rate hike this year. A Bloomberg survey indicates that analysts expect 180,000 jobs to be added (compared with 222,000 in June) and unemployment to ease to 4.3% from 4.4%. We think the most important figure released today will be wage growth, as it has a direct impact on economic growth. We expect wage growth below the consensus of 2.4% y-o-y and 0.3% m-o-m, which would lead to further DXY weakening and gold prices pushing close to $1,275/oz.