Commodities. Oil and Gold Daily - January 26, 2018

> Oil prices slide amid dollar rebound; rig count data eyed. After breaking above $70/bbl late on Wednesday, front-month Brent surged to $71/bbl early yesterday and traded in the $70.6-71.2/bbl range for most of the day. However, it started to slide later and eventually settled at $70.42/bbl, down $0.11/bbl over the session. Post settlement, Brent continued to retreat and it is hovering slightly above $70/bbl this morning. One factor supporting Brent's ascent to $71/bbl late on Wednesday was a slump in the dollar, which makes dollar-traded crude cheaper for those holding other currencies. Although the dollar does not impact oil prices on a day-to-day basis, strong shifts (such as those seen so far this year) can eventually start to take the driver's seat. This was apparent late yesterday after Donald Trump effectively talked up the dollar (see the paragraph on gold below), with the sharp rebound immediately driving crude lower.
The Baker Hughes oil rig count is due today at 21:00 Moscow time. It has largely been stuck in the 730-750 range since early October (note that last year the count peaked at 768 units), and, as an indicator of future oil production, it has so far provided little support to optimistic US crude production outlooks. Last week, investors were digesting a five-unit decrease to 747 rigs following a ten-unit increase the week before. The market reaction to both of these releases was subdued, due in part to cold weather in the US causing disruptions, but also (more importantly, in our view) due to a substantial increase in the number of drilled but incomplete wells (DUC). The DUC count surged by 156 in December to reach a record high of 7,493 (although the data only goes back to December 2013). This effectively means that there is a very large backlog of production waiting to be unleashed that could be brought online relatively quickly (once logistical, economic or labor constraints are resolved). The current rig fleet has already managed to create this backlog, meaning that US shale producers can avoid very capital heavy rig investments and can concentrate on prioritizing better financial returns.
We expect the oil price to continue reacting to the dollar. Our FX analysts expect the greenback to retest its multi-year lows after yesterday evening's spike. We think Brent is likely to draw closer toward the upper end of the $70-71/bbl range and ease later on an expected rig-count increase.
> Gold prices plunge on stronger dollar, but rebound eyed. After trading sideways within the $1,355-1,365/oz range yesterday, gold prices slid to $1,342/oz as the dollar rebounded sharply. This came as EUR/USD broke slightly below 1.24 after having pushed above 1.25 briefly yesterday. The euro peaked after ECB President Mario Draghi confronted US Treasury Secretary Mnuchin's recent remarks about favoring a weaker dollar, saying that the US appeared to be competitively devaluing the dollar, which would go against the norms of the G20. However, later the dollar pared some of the previous losses following remarks from President Trump that the dollar would strengthen and that ultimately he wanted it to appreciate. Our FX analysts note today that despite Trump's recent remark, the damage has already been done and the overall impression that markets came away with this week is of a US government that will gladly accept, even encourage, a weaker dollar. Today, investors will eye Donald Trump's speech at Davos at 16:00 Moscow time and US 4Q GDP and durable goods data at 16:30. The FX team expects the dollar today to revisit its multi-year lows, with EUR/USD once again breaking above 1.25. Gold should benefit from this, and we expect it to consolidate within the $1,360-1,365/oz range later in the day.