Commodities. Oil and Gold Daily - December 11, 2017

> Oil drops slightly on rise in US oil rig count after early surge on Friday. After hovering above $62/bbl early on Friday, the front-month Brent contract started to surge, breaking above $63/bbl later in the day. It eventually settled at $63.4/bbl, $1.2/bbl above the previous close. The shift higher was attributable largely to a factor that we mentioned in Friday's daily: the threat of a nationwide industry strike in Nigeria on December 18. The planned strike could push oil prices higher, as was the case last year, when a strike at ExxonMobil's operations in Nigeria dented the country's production and export figures. The second bullish factor on Friday was upbeat preliminary Chinese customs data that showed a strong m-o-m recovery in oil imports in November, to 9 mln bpd, a level last seen in September. In October, Chinese oil imports confounded the market with a 2.7 mln bpd m-o-m drop to 7.3 mln bpd.
This morning, the front-month Brent contract is trading around $0.4/bbl below Friday's peak, hovering slightly above $63/bbl. Oil's current weakness owes mainly to the two-unit increase in the Baker Hughes US oil rig count in the week to December 8, as reported on Friday. However, the second straight two-unit increase looks rather moderate when compared with the two nine-unit increases in November, which is probably why the bearish reaction was subdued. Nonetheless, market players continue to follow the US rig count data carefully, as a rapid surge in production is possible given the large number of drilled but uncompleted wells (many drillers are waiting for better economic conditions or for logistical constraints to be resolved). There are also fears that US shale producers could begin to rethink their strategy for next year given the higher oil prices, potentially switching from a "returns-first" approach to prioritizing higher production at higher costs.
The Organization of Arab Petroleum Exporting Countries (OAPEC) met on Sunday. Kuwait's oil minister highlighted the fact that before next June, a study on the exit strategy for the OPEC+ deal will be completed and ready to discuss at the OPEC+ monitoring committee meeting (these meetings are held once every two months). This study, which was previously mentioned by the Saudi energy minister after the latest OPEC+ meeting, can be interpreted as either bullish or bearish at this stage. Since the beginning of this year, investors have feared that the OPEC+ producers will flood the market once the deal expires. Many were calmed by the fact that OPEC was looking into a gradual exit - one which would likely prevent a sharp price correction. However, others fear that if the conditions of an exit are approved early, the strategy could be deployed immediately after the following OPEC+ meeting if it were to be determined that the market had rebalanced. Today, we expect Brent to hold above $63/bbl. Key reports from the EIA (including its short-term energy outlook), OPEC and IEA will be coming in throughout the week, starting tomorrow, and should help determine the trajectory of oil prices.
> Gold steadies on mixed US jobs report; busy week ahead. Having continuously slid throughout most of last week to reach as low as $1,245/oz after almost $35/oz of losses, gold was flat on Friday. It was trading in a range of $1,245-1,250/oz then and is moving toward the upper end of that range this morning. The latest US jobs report, released on Friday, was mixed, and the dollar and Treasuries failed to show a clear response. Job growth was strong in November, nonfarm payrolls increasing by 228,000 to beat expectations of a 195,000 increase. Hourly earnings, however, remained below the expected 2.7% y-o-y pace, instead coming in at 2.5%. This was taken to mean that there is not yet strong inflationary pressure in the economy. This week is all about the Fed decision, which will be announced on Wednesday. The Fed is certain to raise rates by 25 bps to 1.50% (for more, see our FX team's preview, "Yellen's Last Hike," published today). We think this outcome was fully priced in to gold prices last week, driving the losses. With the third hike this year all but a formality, investors will look to outgoing Fed Chair Yellen's press conference, and gold is likely to pare some of the losses. Before Wednesday, however, we think that it will consolidate at around $1,250/oz.