Commodities. Oil and Gold Daily - December 6, 2017

> Oil slips on API report of large builds in US refined product stocks. After trading around $62.4/bbl early yesterday, the February Brent contract rose to an intraday high of $63.1/bbl. It was unable to hold above $63/bbl for long and eventually closed at $62.86/bbl, up $0.41/bbl on the day. After the close, it plunged $0.4/bbl following the release of API inventory data. This brought the oil benchmark close to $62.5/bbl, where it continues to trade this morning. The API headline crude inventory figure was bullish, while the refined products numbers were very bearish. US crude inventories shrank by 5.5 mln bbl in the week to December 1 (the Bloomberg consensus was for a 2.5 mln bbl drop), to 451.8 mln bbl (below the EIA's 453.7 mln bbl estimate from last week). The draw was driven by a 0.73 mln bpd fall in imports, to 7.5 mln bpd, and a small 0.05 mln bpd rise in refinery runs. A large 2 mln bbl draw at Cushing was attributed mainly to the 0.59 mln bpd Keystone pipeline being shut down because of a leak. The pipeline is currently operating at reduced capacity, and it is still unknown when it will return to full capacity. The latest draw at Cushing (according to the EIA, stocks there had fallen by 6.2 mln bbl in the three weeks prior) further narrowed WTI's discount to Brent, from the almost $7/bbl seen in early November to just $5.3/bbl. We think today's EIA data, due at 18:30 Moscow time, is unlikely to show such a large crude inventory draw. We expect a drop of up to 3 mln bbl.
However, we believe a dip closer to $62/bbl is in the cards, as we expect the EIA's refined products data today to mirror the bearish API figures released overnight. Gasoline stocks were up by a massive 9.2 mln bbl, while distillate inventories rose by 4.3 mln bbl, suggesting that we will see a very large increase in total stocks (oil and products combined) this week. As we have noted previously, the refined product inventory levels have remained close to their five-year averages recently, keeping refinery runs near the highs of the summer driving season. However, the latest EIA reports have shown signs of slowing demand, suggesting that stockpiles will start to swell.
> Gold continues to retreat on expected US tax reform and Fed rate hike. After hovering above $1,275/oz, gold prices slid to hit an intraday low of $1,262/oz yesterday. The slide was accompanied by gains in the dollar amid continued weakness in Treasury yields, which has lasted all week. This morning, gold is recovering toward $1,270/oz on further weakness in Treasuries. Since late November, gold's losses have been a lot bigger than the dollar's gains, with Treasury yields now about back to the levels where they were in late November. We attribute this to investors' pricing in what is now an almost certain Fed rate hike on December 13. Before the previous two rate hikes, we saw similar speculative activity, which led to losses in gold. But after the hikes, gold pared losses.
It seems more and more likely that US tax reform will be passed by year end, boosting prospects for US growth and supporting the dollar. That, along with the cut to corporate taxes, would lead to higher profits, putting to the side gold's safe-haven appeal. Bloomberg notes that put options to sell January and February gold futures (to hedge against further decreases) are in high demand now (the heaviest volumes are for the right to sell at $1,250/oz), the instruments' prices rising substantially. Today, investors await the ADP US employment report, which is due at 16:15 Moscow time. We think that gold will initially manage to hold in a range of $1,265-1,270/oz today and then retreat closer to $1,265/oz later on.