Commodities. Oil and Gold Daily - January 30, 2018

> Oil prices slide as dollar recovers; US crude inventory build eyed. The front-month Brent contract was hovering just below $70.5/bbl early yesterday before starting to slide. It eventually settled at $69.46/bbl, closing $1.06/bbl below its previous settlement. Oil prices started to fall on early signs of a recovery in the dollar - Brent broke below the key $70/bbl threshold after EUR/USD retreated below 1.24. In Asian trading this morning Brent resumed its descent, breaking just below $69/bbl. This comes despite a steadied dollar, with both EUR/USD and the DXY trading around levels reached late yesterday. Note that Brent's 120-day moving correlation with EUR/USD and the DXY started to increase rapidly in the second half of this month (when the dollar started to weaken considerably), as non-dollar investors started to take advantage of crude being cheaper in other currencies. The correlation is now approaching 80%, whereas there was no correlation at all at the beginning of the year. We also think that the current rather extreme hedge fund positioning (the latest CFTC data showed that the ratio of longs to shorts is at a multiyear high of 11.2 to 1) has already started to play against the speculative majority. A very crowded and one-sided trade is encouraging (and will further encourage) hedge funds to take profit on any reasonable opportunity. This will pressure prices and will likely produce something of a snowball effect in the medium term.
Another factor that is pressuring oil prices this morning is the pricing in of a weekly build in US crude oil inventories after ten consecutive weeks of declines (the latest median estimate given to Bloomberg suggests a 0.8 mln bbl increase). The latest API report is due overnight at 00:30 Moscow time. Last week, the EIA reported a bullish 1 mln bbl decrease in crude stocks (to 411.6 mln bbl), compared with the API's estimate of a 4.8 mln bbl build (to 416.2 mln bbl). As we noted last week, we found EIA's reported figure hard to explain, given that refinery runs were down significantly while imports rose and crude oil output surged 0.13 mln bpd to almost 9.88 mln bpd. We also think that these major bearish trends will continue and think that the EIA will report the first weekly crude oil stock build since early November. The API figure, on the other hand, is more likely to show very little change from last week's 416 mln bbl, in our view. A continuing build in gasoline stocks (the Bloomberg median estimate is for a 2 mln bbl increase) will also have a bearish effect on prices through the releases. For most of the day today, we expect Brent to continue following the dollar (which our FX team expects to trade mostly flat) and to trade around $69/bbl and then retreat closer to $68.5/bbl overnight on the API release.
> Gold prices slide on rising US Treasury yields and dollar strength. Gold hovered just below $1,350/oz early yesterday under pressure from rising US Treasury yields and even slid below $1,340/oz for a short time as the dollar started to firm. This morning, the dollar is still trading at elevated levels, while Treasury yields are once again climbing after taking a short breather. Gold retreated to $1,335/oz during Asian trading today. US consumer spending (around 65% of US economic activity) and incomes were up in December and in line with expectations, providing support to the dollar and also reinforcing tomorrow's Fed decision as a non-event, according to our FX team. Investors are awaiting Donald Trump's state of the union address at 5:00 Moscow time, where the tone with which he will push his "America First" agenda will be of major importance. We expect no major dollar moves ahead of tomorrow's Fed decision, so we see gold stabilizing within the $1,335-1,340/oz range.