Commodities. Oil and Gold Daily - January 15, 2018

> Oil prices remain elevated despite rise in North American rig count. The front-month Brent contract was hovering above $69/bbl early in Friday's trading before sliding to an intraday low of $68.64/bbl midday. The decline was, however, short-lived, and Brent swiftly pared back its losses, eventually settling at $69.87/bbl, $0.61/bbl above the previous settlement. This morning, the front-month Brent contract for March delivery is trading around the $70/bbl mark.
Oil's latest surge came despite a ten-unit w-o-w increase in the Baker Hughes US oil rig count to 752 in the week to January 12. This was the largest weekly increase since last September and the first since early December. In our view, the market's subdued reaction to the bearish rig count data may have been due to the confusion over the level of US crude output after the EIA's recent downward adjustment to its estimate. We attribute the rather sharp 0.29 mln bpd revision, to 9.49 mln bpd, mainly to the extremely cold weather in northern states early in the year, which haltered upstream operations. We think that the large increase in the rig count could amplify the bearish effect of the expected weekly rebound in the EIA's US oil production estimate, which is due on Wednesday. Meanwhile, in Canada, where the EIA expects oil output to increase by 1.7 mln bpd over the next two years, the number of active oil rigs increased by a massive 87 units, to 185. However, the spike was seasonal in nature. After the previous Christmas break, Canadian energy firms added 85 rigs. The Canadian rig count tends to decrease in the spring, when melting snow makes it too muddy to operate.
It also worth highlighting that CFTC data continues to show firm bullish sentiment. The latest weekly update showed the ratio of long positions to shorts increasing from 9.8 to 1 to 10.2 to 1, nearly matching last February's 10.3 to 1. With the ratio this high, many hedge funds may start looking to take profit on their long positions. In the past, such large overhangs have usually led to sharp cutbacks in long positioning in the absence of positive market developments. For example, last February's similar overhang led to Brent falling around $12/bbl to as low as $45/bbl in June. Trading activity will be subdued today due to a federal holiday in the US. We expect Brent to continue trading within the $69-70/bbl range for the rest of the day.
> Gold up further on weaker dollar. After surging by $10/oz to above $1,330/oz early on Friday, gold prices retreated back to $1,325/oz once the dollar halted its intraday decline. This nascent correction proved short-lived, however. The dollar subsequently resumed weakening, which caused a sharp jump in gold to a range of $1,340-1,345/oz, where it remains this morning. The dollar was driven lower on Friday by a rising euro, which gained following an ECB announcement that, if economic data continues to be favorable, it could wind up its bond-buying program earlier than previously expected. Also supporting the euro was a coalition deal in Germany struck between Angela Merkel's Christian Democrats and the rival Social Democrats. Elevated global uncertainty due to US-Iranian tensions is also supporting gold. Note that on Friday, although Donald Trump extended waivers of key economic sanctions on Iran, he delivered an ultimatum to European countries and pledged to rewrite the nuclear agreement or otherwise reinstate stringent economic measures against Iran by mid-May. News flow today will be subdued given that US markets are closed for a holiday. Despite the fact that the dollar has weakened quite a bit recently, our FX analysts think that it has broken below some key levels, which warns of further losses. We think that further gains in gold will be limited due to the US holiday. We expect to see gold within a $1,345-1,350/oz range.