Commodities. Oil and Gold Daily - January 10, 2018

> Oil prices surge despite upward revision to EIA US output projection. Front-month Brent was trading around the $68/bbl mark yesterday but broke above $69/bbl later in the day before settling at $68.82/bbl, $1.04/bbl above the previous settlement. As we expected, the EIA made an upward revision to its US oil production forecast for the year in light of the higher oil price environment and despite the latest slowdown in the rig count increase. The agency previously forecast a 0.78 mln bpd y-o-y rise to 10.02 mln bpd, and it now expects growth of 0.97 mln bpd to a year average of 10.27 mln bpd. The IEA's latest estimate is for US growth of 1.11 mln bpd this year, while OPEC sees it at 1.06 mln bpd. The EIA expects the US to surpass the 10 mln bpd threshold during the first quarter and the 11 mln bpd mark by end 2019. However, the EIA has also revised its 2018 global demand growth projection up from 1.62 mln bpd to 1.72 mln bpd, which the market has taken rather bullishly given the latest upbeat sentiment. The IEA currently estimates global demand growth of 1.29 mln bpd, while OPEC projects growth of 1.51mln bpd. These figures could be updated at the end of next week when these organizations' monthly reports are due.
> API data supports oil prices; EIA inventory estimates eyed. Brent surged $0.5/bbl after the close following the release of API inventory data. This again brought the benchmark above $69/bbl, where it remains this morning. The API's headline crude inventory figure was very bullish, while the refined products numbers were bearish. US crude inventories shrank 11.2 mln bbl in the week to January 5 (the Bloomberg median consensus was for a 3.75 mln bbl drop) to 416.6 mln bbl (below the EIA's 424.5 mln bbl estimate from last week). The draw was driven by a 0.2 mln bpd w-o-w increase in refinery runs. Gasoline stocks were up 4.3 mln bbl w-o-w (exceeding expectations of a 3.5 mln bpd increase) while distillates were up 4.7 mln bbl (versus expectations of a 2.25 mln bpd increase). We think today's EIA data, due at 18:30 Moscow time, is likely to show a substantial crude inventory draw of around 6 mln bbl, which will be counterbalanced by stronger combined builds in gasoline and distillates, pressuring prices back to $68.5/bbl upon the release. As we noted yesterday, weak refining margins (caused by refined product stock builds, as demand is seasonally low) are a strong sign of weaker fundamentals and are likely to lead to lower refinery runs and thus lower demand for crude, which will materialize in crude stock builds over the medium term.
> Gold prices drop as US Treasury yields surge, with DXY also rising. Gold prices started to decline early yesterday, initially falling by around $5/oz under pressure from the dollar, which has been recovering lately, especially with the eurozone December CPI coming out below expectations on Friday. Later in the day, gold fell another $5/oz to $1,310/oz (where it remains this morning), pressured by a strong recovery in US Treasury yields. The benchmark 10y yield reached a 10 month high after the Bank of Japan announced it would cut back on purchases of long-dated Japanese government bonds from the open market, which many investors view as a sign that the regulator is preparing to rein in stimulus measures. A subsequent pickup in the safe-haven Japanese yen (with which gold is positively correlated) has limited gold's losses, in our view. This morning, DXY has started to weaken on the back of the strengthening yen. We expect gold to remain deadlocked between the above-mentioned factors at play and consolidate within the $1,310-1.315/oz range for the rest of the day.