Commodities. Oil and Gold Daily - January 11, 2018

> Oil prices steady after yesterday's mixed EIA data. The front-month Brent contract hovered just above $69/bbl yesterday prior to the release of the weekly EIA report. The data at first caused Brent to fall to an intraday low of $68.8/bbl. However, it swiftly recovered, eventually settling at $69.2/bbl, $0.4/bbl above the previous settlement. This morning, the Brent contract for March delivery continues to trade in a narrow range just above $69/bbl.
The EIA reported a 4.9 mln bbl decrease in crude stocks (to 419.5 mln bbl), which was less bullish than API's 11.2 mln bbl estimate. In our view, the highlight of the EIA report was a sharp 0.29 mln bpd decrease in the US crude oil production estimate, to 9.49 mln bpd. We think this is what prevented Brent from holding below $69/bbl. The revision was a surprise and could have been an adjustment following the lack of clarity over the EIA's assessment of total US output last year, when the figures in the monthly report (EIA-914) differed significantly from the figures in the weekly update for the same months - the latter were sometimes as much as 0.3 mln bpd higher than the former. We, however, think it unlikely that the EIA artificially adjusted the figure, especially given that on Tuesday it published a 9.94 mln bpd average production estimate for January this year. In our view, the sharp weekly drop in US production was linked to the extremely cold weather in northern states last week, which haltered upstream operations. We expect production to rebound next week, which would be bearish.
In our view, the report would have been viewed as bearish were it not for the drop in crude output. Refinery inputs were down 0.28 mln bpd w-o-w, but were still at an all-time high for this time of the year of 17.3 mln bpd, at a time of seasonally low demand. This essentially means that stockpiles shifted from the crude oil to the refined products category. Gasoline stockpiles rose by 4.1 mln bbl, in line with the API's estimate of a 4.3 mln bbl build. Diesel inventories climbed 4.2 mln bbl, also in line with the API's estimate of 4.7 mln bbl. The increase in both gasoline and distillate stocks exceeded market expectations. We think oil's price momentum indicates downside risk, as is also suggested by technical indicators such as the Relative Strength Index, which points to the front-month contract being overbought. A similar pattern occurred in September and November last year, which led to a price correction. We expect the front-month Brent contract to slip below $69/bbl today and consolidate in a range of $68-69/bbl.
> Gold rises as DXY falls on news that China will halt Treasury purchases. After trading around $1,310/oz early yesterday, gold began to advance, reaching an intraday high of $1,325/oz. The gains came amid a sharp correction in the dollar, which proved to be a stronger force than the surging Treasury yields (rising UST yields are usually negative for gold). Prices started moving after a Bloomberg report claiming that China was considering halting purchases of Treasuries, which only added to the already negative mood in bond markets, driven by expectations that central bank balance sheets will peak this year, as our FX analysts noted today. We had expected gold to be flat yesterday, caught between the dollar and Treasuries. Gold has retreated from yesterday's intraday high and is trading slightly above $1,315/oz this morning, after China's FX regulator overnight called the Bloomberg report "fake news," helping the dollar to start paring losses. Today, ahead of CPI data tomorrow, markets are eying US PPI data. We think that gold will consolidate today in a range of $1,310-1,315/oz as the worries about China's halting Treasury purchases fade.