Commodities. Oil and Gold Daily - July 12, 2017

> Oil prices rise on revised 2018 US production growth forecast. After dipping almost $1/bbl to $46.3/bbl by midday, Brent September futures gained substantial momentum and closed $0.64/bbl higher on the day at $47.52/bbl. This rise was driven by the release of updated US production forecasts by the EIA. The agency now sees production averaging 9.3 mln bpd over 2017 and 9.9 mln bpd in 2018 and cited its new, lower 2018 Brent forecast of $52/bbl (down $4/bbl) for the downward revision. Another bullish takeaway was an upward revision to the 2018 US demand growth estimate (by 0.05 mln bpd to 0.36 mln bpd y-o-y. The latest Bloomberg Intelligence data shows that only 7.6% of oil volumes are currently hedged in 2018, compared with 30.1% in 2017. This means that shale produces are exposed to spot prices, which are currently volatile and remain close to the average breakeven levels for most shale basins. This factor could hinder US oil production growth next year.
> Crude inventory draws in the US also provided a boost. After settlement, the Brent front-month contract increased by $0.7/bbl following the weekly API data release to reach $48.3/bbl, where it is trading this morning. The API reported that US crude stockpiles fell 8.1 mln bbl to 495.6 mln bbl in the week to July 7. The strong drop significantly overshot the Bloomberg median estimate (2.45 mln bbl decline) and was driven by a fall in imports. Imports were down by 2.88 mln bpd while refinery runs were slightly down, by 0.02 mln bpd. Last week, the EIA estimated that US crude inventories fell to 502.9 mln bbl in the week to June 30, which currently exceeds the latest API figure by 7.3 mln bbl. Refined product inventory data was mixed, with gasoline stocks providing bullish momentum. Gasoline stocks unexpectedly fell 0.8 mln bbl, confounding the Reuters consensus (1.1 mln bbl increase). Distillate inventories were up 2.1 mln bbl, compared to the market expectation of a 1.1 mln bbl rise.
The EIA numbers covering the same period as the latest API data are due today at 17:30 Moscow time, and if they are in line with the API data, especially with regard to crude and gasoline, we think a pickup to $49/bbl will definitely be in the cards.
> Monthly OPEC report unlikely to drive prices lower today. The OPEC secretariat's monthly report is due today and its assessment of June output will be key. Earlier this month, the Reuters survey indicated that member countries' total crude output (both those obliged and not obliged to cut) rose by 0.28 mln bpd m-o-m from 32.44 mln bpd in May to 32.72 mln bpd in June. We expect similar m-o-m growth numbers from the OPEC secretariat today, and Reuters has already seen the official preliminary OPEC data, which reportedly shows 0.3 mln bpd growth in June to 32.47 mln bpd (both those obliged and not obliged to cut). We do not think that the official release will significantly pressure prices, as the rise in overall OPEC production in June has already been priced in by the market.
> Gold prices move higher ahead of Yellen's testimony. The gold prices was up almost $12/oz at $1,220/oz by midday on dollar weakness and a subsequent decline in the 10y US Treasury yield and strengthening yen. This morning, gold remains within the $1,215-1,220/oz range. The dollar weakened on the back of the emails released by Donald Trump Jr, which showed that he welcomed Russian support offered to his father's election campaign last year. Meanwhile, Fed officials signaled caution over the pace of further interest rate hikes as wage growth and inflation remain weak. A strengthening euro also put pressure on the dollar, as investors are becoming more confident that the ECB will hike rates next year for the first time since 2011. Given the latest developments and another unexpected surge in US political uncertainty, we think gold will likely end the week above $1,210/oz. Yellen's two-day semiannual monetary policy testimony (today and tomorrow) is unlikely to resuscitate aggressive monetary policy sentiment and in our view will be rather neutral, so it should not offer much of a threat to gold prices.