Commodities. Oil and Gold Daily - January 17, 2018

> Oil falls amid EIA shale growth projection; API inventory data eyed. Front-month Brent was trading close to $70/bbl early yesterday but eventually started to slide and settled at $69.15/bbl, down $1.11/bbl over the session. The latest EIA drilling productivity report, released at 22:45 Moscow time, was rather bearish and has pushed prices even lower this morning, with Brent hovering slightly above $69/bbl. The report indicated that US tight oil production will continue to increase in February. The EIA expects it to rise by a robust 0.11 mln bpd m-o-m to 6.55 mln bpd. Last week, the EIA made a sharp 0.29 mln bpd downward adjustment to its weekly US crude production estimate to 9.49 mln bpd, which we attribute to the extremely cold weather in northern states at the start of the year and, given the latest report on shale production, is sure to be temporary. The EIA expects total US production to pass the 10 mln bpd mark in February and 11 mln bpd by end 2019. In its monthly drilling productivity report, the EIA singled out seven major shale regions, six of which it expects to drive m-o-m shale production higher in February. Note that production is all seven regions is expected to grow y-o-y in February. Key sources of growth are expected to be Permian (up 0.076 mln bpd to 2.87 mln bpd) and Eagle Ford (up 0.015 mln bpd to 1.27 mln bpd) basins in Texas and North Dakota's Bakken play (0.009 mln bpd to 1.22 mln bpd). The EIA also noted another increase in the total number of drilled but incomplete wells in December to a record high of 7,493, up 156 over the month (although the data only goes back to December 2013).
This morning, Brent is trading just above $69/bbl as investors are starting to price in a decline in US crude stocks in the forthcoming inventory data, which has been delayed by a day due to the US holiday on Monday. We expect the weekly API report, due overnight at 00:30 Moscow time to indicate a slowing crude inventory drawdown or even a small build, which would defy expectations and be bearish (the Bloomberg median estimate suggests a 2.9 mln bbl w-o-w decline). Last week the EIA reported a 4.9 mln bbl fall in crude stocks (to 419.5 mln bbl), which was less bullish than the API's 11.2 mln bbl estimate (to 416.6 mln bbl). We also think a moderate crude oil drawdown would struggle to offset the bearish impact of an expected build in gasoline (the Bloomberg median estimate forecast is for a 3.5 mln bbl w-o-w rise) and distillates (the Bloomberg median estimate is for a 2.25 mln bbl w-o-w rise). We expect Brent to continue hovering above $69/bbl today and be pressured below this level overnight.
> Gold trading sideways as dollar tries to pare back losses. Gold was trading sideways yesterday after initially tumbling from $1,342/oz to an intraday low of $1,332/oz, as the DXY Index showed signs of a recovery, unwilling to break below the key support level of 90. DXY once again started to slide toward 90 later in the day, with gold paring back the earlier losses and almost breaking above $1,344/oz. However, this move was short-lived, with choppy trading returning driven by a renewed recovery in the dollar, and gold was pressured back to the $1,330-1,335/oz range. The dollar has shown signs of a recovery due to developments in Europe undermining the euro. Our FX analysts assert that the euro was led lower on reports that elements of Germany's SPD do not want to start coalition talks with Chancellor Merkel. In addition, ECB member Francois Villeroy has remarked that recent euro gains are a "source of uncertainty which requires monitoring." Our FX team also notes that nervousness surrounding the dollar is understandably on the rise as Friday's potential US federal government shutdown nears. Today, investors will eye the Eurozone CPI, US industrial productions and the Fed's Beige Book, though these are unlikely to alter impact DM currency markets. We think gold will continue to trade sideways in the $1,330-1,335/oz range.