Commodities. Oil and Gold Daily - January 29, 2018

> Oil prices stable amid steady dollar after surge in US rig count. On Friday, the front-month Brent contract was trading sideways within a narrow $70.0-70.8/bbl range. It eventually finished at $70.52/bbl, $0.1/bbl below its previous settlement. Brent continued to reflect the moves in EUR/USD for most of the day on Friday following a recent slump in the dollar that helped oil prices break above multi-year highs. EUR/USD continues to trade in a 1.24-1.25 band this morning, underpinning the steady oil price momentum, with Brent hovering above $70/bbl. The dollar's strength will continue to be the major factor driving oil prices this week. In order for Brent to drop below $70/bbl, EUR/USD would need to dip closer to 1.23, all things equal. We also see little upside for oil prices given that CFTC data continues to show firm bullish sentiment among hedge funds and an extreme skew toward long positioning. The latest weekly update showed the ratio of longs to shorts increasing from 10.5 to 1 to 11.2 to 1, implying a very crowded trade and, hence, little further upside.
The key data point on Friday was a 12-unit w-o-w rise in the US oil rig count to 759 in the week to January 26 (the rig count peaked at 768 units last year). The majority of rig additions were in the Permian Basin. This followed a very strong weekly US crude output growth reading from the EIA, which reported a 0.13 mln bpd increase to almost 9.88 mln bpd (the EIA expects US production to surpass 10 mln bpd in February). The market's reaction to the rig count data was, however, subdued, and prices only began to decline an hour after it came out, close to settlement. We had expected a subdued reaction (see our previous Oil and Gold Daily), as market players have become convinced that US output will continue to grow even amid a steady rig count. We think that only a sustained rise in the US active oil rig count would be enough to significantly undermine sentiment, as it would point to the return of heavy capital spending among US shale producers (after a slowdown in spending to focus on profits). There are already signs of this. Reuters recently reported that the large shale producer EP Energy planned to increase capital spending 9% y-o-y to $650 mln this year.
> Gold prices stable; signs of correction emerge. After surging to $1,350-1,355/oz early on Friday, gold managed to trade above $1,355/oz for a brief period midday. Gold tracked EUR/USD quite closely, rising with it early on and then retreating as the dollar started to pare back its previous losses. This brought gold back to the $1,345-1,350/oz range this morning. US Treasury yields surged in Asia today, exerting pressure on gold. Although gold has recently actually shown little correlation with Treasury yields, such strong moves will likely end up having an impact. Market players are starting to prepare for Wednesday's Fed meeting (Janet Yellen's last), at which accelerating inflation and strong economic growth are likely to be highlighted. No change in rates is expected, so attention will be on whether the tone of the FOMC statement turns more hawkish. We expect the pricing-in of a more hawkish Fed to start pressuring gold today, which we expect to retreat to $1,340/oz later in the day. Our FX team expects the dollar to remain stable ahead of Donald Trump's State of the Union address tomorrow.