Commodities. Oil and Gold Daily - December 18, 2017

> Oil steady amid drop in US oil rig count. The front-month Brent contract was traded just below $63.50/bbl for most of Friday before settling at $63.23/bbl, down $0.08/bbl over the session. This morning, Brent has been trading above $63.50/bbl, mainly supported by a four-unit decrease in the Baker Hughes US oil rig count in the week to December 15 reported on Friday. This reaction seems subdued given that the latest decline cancels out the four-unit addition seen over the previous two weeks. This can be partially explained by the fact that the market is currently more inclined toward a correction and was largely anticipating an increase and the resulting opportunity to liquidate long positions. This reasoning is backed by the latest CFTC report showing that the ratio of long positions to shorts has increased w-o-w from 8.5 to 1 to 9 to 1 (the highest level since February), implying that many hedge funds could be happy to take profits on their long oil positions. History shows that similar large overhangs usually spark a sharp selloff in long positioning in the absence of positive market developments.
> Nigerian strike and EIA productivity report will shape oil prices today. Factors providing support for prices are the ongoing outage at the Forties North Sea pipeline (which had been scheduled to supply 0.4 mln bpd this month) and a nationwide industrial strike in Nigeria today. Nigeria's main oil union failed to settle a dispute with sector companies on Saturday and declared it would launch a strike today. The 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 exports. We expect prices to draw support midday today as confirmation of the strike and the scale of it emerge. Later today, the market will again focus on US oil production with the publication of the EIA drilling productivity report at 22:00 Moscow time. This will include the agency's shale production growth forecast for January. Last month, the agency said it expected US tight oil production to increase sharply in December, by 0.08 mln bpd m-o-m to 6.17 mln bpd. We think today's report is more likely to show a stronger m-o-m growth figure than the one seen previously and also show an uptrend in the number of drilled but uncompleted wells. Both of these datasets are likely to pressure prices later in the day. All in all, we expect Brent to trade near $64/bbl for most of the day before retreating toward $63.5/bbl very late in the day or even possibly overnight.
> Gold stabilizes, but US tax reform set to provide medium-term pressure. Gold continued to trade within the $1,250-1,260/oz range on Friday after breaking above $1,250/oz late on Wednesday following the Fed's third rate hike of the year. After peaking at $1,262/oz on Friday, it started to retreat and has slid all the way back to $1,253/oz this morning. We attribute the decline to expectations that the US Congress will pass US tax legislation by the end of this week. As our FX analysts note today, the rough plan seems to be for both the House and Senate to hold votes around the middle of the week so that President Trump can sign the bill into law by Christmas. They also think that this looks likely to be achieved and would probably give the dollar a gentle boost; if it does not happen, the negative impact on the dollar would be larger. Given expectations that DXY will break above 94 this week (from 93.8 currently), gold is set to be on the defensive through most of this week, trying to hold above its new $1,250/oz support level. However, today we expect gold to trade at the upper end of the $1,250-1,255/oz range.