Commodities. Oil and Gold Daily - February 12, 2018

> Oil recovers on weaker dollar after surge in US rig count; OPEC report eyed. After trading around $64.3/bbl early in the day on Friday, the front-month Brent contract started to slide as the dollar began to strengthen, reaching $62.8/bbl prior to the Baker Hughes US rig count report. After the release, Brent slid by almost $1/bbl to an intraday low of $61.88/bbl. This move was amplified by further US dollar strengthening. The front-month contract eventually settled at $62.79/bbl, $2.02/bbl below the previous settlement. However, in Asian trading this morning oil prices started to pare back some of Friday's losses. Brent bounced up to within the $63-63.5/bbl range, supported by a weaker US dollar (the DXY slid to close to 90 from 90.5 on Friday), and EUR/USD weakened to around 1.23 after almost breaking below 1.22 on Friday. Brent has been exhibiting a 75% correlation to EUR/USD for 12 consecutive trading sessions (as measured by the 120-day moving correlation between the two).
The key data point on Friday was a 26 unit w-o-w rise in the US oil rig count to 791 in the week to February 9 (the rig count peaked at 768 units last year). The majority of the rig additions were in the Permian Basin. This followed a very strong weekly US crude output growth reading from the EIA, which reported a 0.33 mln bpd increase to 10.25 mln bpd. Because the release coincided with a spike in the dollar to an intraday high on Friday, the actual effect this had on gold prices is unclear. However, it has to be noted that the latest data suggests that US production this year is now more likely to exceed most of the forecasts previously published by major analytical houses. We think further upward revisions are likely, which will further pressure oil prices in the medium term. Last week, the EIA revised higher its output growth forecast for 2018 non-OPEC to a very strong 2.35 mln bpd y-o-y, while it expects total US production to grow to 1.77 mln bpd y-o-y. The monthly OPEC report is due today at 14:00-15:00 Moscow time. We think the report will be largely bearish. Major bearish takeaways will be a monthly increase in OPEC production in January (mainly driven by Nigeria, which could cause speculation over its commitment to the OPEC+ deal) and a third consecutive revision higher of the non-OPEC output growth estimate (mainly driven by the US). A slight upward revision to the 2018 global demand growth forecast is also in the cards (currently stands at 1.52 mln bpd y-o-y), as well as further decline in OECD inventories above the five-year average in December, although in our view neither is likely to be enough to generate positive price momentum today. The dollar is expected to remain the main driver of oil prices. We see Brent retreating to $63/bbl on the OPEC report release before rising back up to closer to $64/bbl later in the day.
> Gold up on weaker dollar as equities recover. After trading above $1,320/oz early on Friday, gold prices started to slide and settled into a range of $1,310-1,315/oz, where they spent much of the rest of the day. During today's trading in Asia, gold managed to pare all of its losses from Friday and bounce back above $1,320/oz. During the selloff in equity markets last week, investors were keen to invest in the dollar. Late on Friday, the S&P 500 showed signs of recovery, which pressured the greenback, supporting gold. Our FX analysts noted today that the focus this week remains on US markets and volatility. January retail sales and CPI data is due from the US on Wednesday and will set the tone for the price action in global markets and commodity markets in particular, especially since signs of a pickup in inflation were a key trigger for the recent market turmoil. Today's schedule is very quiet. We expect EUR/USD to hold near 1.23, with gold trading at $1,310-1,315/oz for most of the day.