Commodities. Oil and Gold Daily - August 8, 2017

> CFTC data shows bullish change in oil sentiment. After dipping from as high as $52.5/bbl to as low as $51.4/bbl yesterday, the front-month Brent contract closed at $52.37/bbl, down $0.05/bbl on the day. CFTC data for the week to August 1, when Brent climbed from $49/bbl to nearly $53/bbl, showed hedge funds' long positions in WTI and Brent futures and options increasing by 71 mln bbl to 837 mln bbl, marking the largest weekly gain this year. This ended a period of indecision that began in mid-June, when longs stayed nearly flat at around 750 mln bbl. The data also pointed to short-covering for the fifth week in a row - shorts fell 30 mln bbl to 186 mln bbl. The volume of shorts is low enough for us to assume that the short-covering is nearly over and will no longer support prices. We think the first bullish shift in positioning in a long time was triggered by improved sentiment following the recent JMMC meeting and the Saudi energy minister reiterating that Saudi Arabia would cut exports by 0.6 mln bpd to 6.6 mln bpd in August, translating into a 0.7 mln bpd y-o-y drop and faster inventory drawdown in the US, thus accelerating the market rebalancing. The threat of US sanctions against Venezuela also played a role. We think the only factor that could encourage a further buildup in longs and drive prices higher is a sharp decline in US crude oil and refined product stockpiles, with the crude inventory draw driven by a drop in imports from OPEC. As for this week, we anticipate a break above $53/bbl today following the release of the EIA report, which we expect to include a downgrade to the 2017 US crude output forecast.
> China crude imports weak; price impact minimal. Brent is still trading in the $52-53/bbl range, seemingly unnerved by the weak data from China earlier today. In July, Chinese crude imports fell 1.36 mln tonnes to 34.74 mln tonnes, which is still 3.67 mln tonnes above the level a year earlier. A 2H17 drop in imports is almost inevitable, as Chinese majors kept buying crude in 1H17 for upcoming refinery starts and expansions. Much of it was put into storage ahead of test runs. This resulted in a staggering 1.07 mln bpd H-o-H import gain in 1H17, which implies that the Chinese market is oversupplied to the tune of 0.4 mln bpd. This and the likelihood that Chinese majors will be forced to cut refinery runs in 3Q17 to drain excess refined product inventories may pressure 2H17 imports, which we think will be below the 1H17 average. However, we still expect a y-o-y gain of around 0.6 mln bpd for the full year 2017.
> Hedge funds continue to build long positions in gold. Yesterday's trading was subdued. For most of the day, gold traded just below $1,260/oz, the new resistance level after the strong US jobs report. CFTC data for last week - an eventful week which saw gold rise $20/oz to $1,270/oz - indicates that hedge fund sentiment continued to improve. Money managers built up longs for the third week in a row while vigorously reducing shorts for the second week running. This means that some speculative bullish trades made prior to the July Fed meeting benefited from weak inflation data later in the week, which pushed gold higher. Gold's gains last week owed mainly to short-covering. Short positions are now low enough to assume that the price support from short-covering has ended. For prices to rise, hedge funds will need to start adding to their long positions. However, we have not yet seen enough bullish developments to fuel such a move.