Commodities. Oil and Gold Daily - February 1, 2018

> Oil rallies on mixed EIA inventory data showing signs of strong demand. After beginning yesterday near $68/bbl, the new front-month April Brent contract started to surge, reaching $68.5/bbl before the EIA data came out. The data caused a brief selloff, although this proved to be very short-lived, and Brent rebounded, eventually settling at $68.89/bbl, up $0.37/bbl on the day. It continued to climb post-settlement and traded just above $69/bbl this morning. As we noted yesterday, Brent has started to decouple with EUR/USD (the correlation had been strong since mid-January). EUR/USD traded sideways within a 1.235-1.245 range over the last few sessions, while Brent slid almost $2.5/bbl as investors began to price in a weekly build in US crude inventories following ten consecutive draws. The build did materialize, but markets quickly brushed it aside and began to focus on the other data, which was mostly bullish.
The EIA reported a 6.7 mln bbl increase in crude stocks (to 418.3 mln bbl) yesterday, a day after the API reported a 3.2 mln bbl expansion (to 419.5 mln bbl). The buildup was driven by another strong weekly drop in refinery runs (due to seasonal maintenance), along with a surge in imports and output. Crude stockpiles are likely to continue growing in February, in our view, as refinery activity looks set to further decline, while exports will be pressured by the recent strengthening of WTI versus Brent. Yesterday's report, however, indicated that this could all be offset, as there were some bullish developments in refined products. Gasoline stocks unexpectedly fell by almost 2 mln bbl (the Bloomberg consensus was calling for a 2 mln bbl increase given the usual seasonal trend), while distillate inventories were down 1.9 mln bbl. Both draws were driven by strong demand. The EIA estimates demand for every refined product type on a weekly basis (it does not actually collect data on this). Based on these figures, total demand for refined products has been exceptionally high this year, averaging 20.7 mln bpd in January, up 1.5 mln bpd y-o-y. If the trend holds, this would tell us that the higher oil prices have not had a meaningful impact on end-user demand as the IEA (for example) had feared. This would be a very positive sign, as strong demand is crucial for further market rebalancing. We think Brent is likely to slip just below $69/bbl today on profit taking after yesterday's rally. We see it trading within a $68.50-69.00/bbl range for most of the day.
> Fed meeting fuels gold price volatility; correction in the cards. After trading for most of yesterday near the top of a $1,340-1,345/oz range, gold started to slide toward the lower end prior to the Fed decision. Upon the announcement, it plummeted to an intraday low of $1,333/oz, although the losses proved short-lived and it rebounded all the way to $1,347/oz. This morning, however, gold is once again under pressure from a strengthening dollar, already down to below $1,340/oz. The Fed kept interest rates at 1.5% yesterday (as expected) and delivered a statement that was upbeat on growth and inflation. Our FX analysts noted that this cemented market expectations that the US would hike rates by 25 bps to 1.75% on March 21. These developments are supporting the dollar today, which is likely to strengthen further, testing 1.2350 versus the euro. This suggests a correction in gold to slightly below $1,335/oz, in our view.