Commodities. Oil and Gold Daily - July 17, 2017

> Oil prices firm amid strong refinery runs in China. The Brent September contract experienced a very choppy session on Friday, undergoing a series of intraday swings (some as large as $0.7/bbl) to eventually settle at $48.91/bbl, up $0.49/bbl on the day. Since then, Brent has held steady and is still trading around $48.9/bbl this morning. Market sentiment is rather upbeat following strong Chinese import data and a National Bureau of Statistics report showing that refineries in China increased throughput by 0.23 mln bpd m-o-m in June to 11.21 mln bpd, close to the December figure of 11.26 mln bpd. The m-o-m gain was mainly driven by small independent refineries on the back of a new set of crude oil import quotas, with large majors running their plants at a constant rate throughout the year. However, we think the strong Chinese demand should not be viewed too optimistically for 3Q17, as China's largest refineries may be obliged to reduce operations in 3Q17, inevitably undermining global demand. The distillate market surplus is now close to 0.3 mln bpd, with a surplus of close to 0.13 mln bpd on the gasoline market. In March, total product stocks in China were close to 160 mln bbl, up 5 mln bbl y-o-y and 15 mln bbl above the level seen in March 2015, clearly pointing to an oversupplied market. Adding to OPEC's headache is a recent report that state-owned Chinese majors Sinopec and Petrochina will address this issue in 3Q17 by reducing refinery runs at a time when motor fuel demand seasonally peaks. Analysts are currently trying to evaluate the scale of these reductions. Energy Aspects recently said that production cuts will not be as deep as many had previously expected, while Reuters assumes that China's 15.5 mln bpd refining capacity will be cut by 10% in 3Q17, including maintenance work.
> Modest pace of rig additions in US. Oil bulls were also encouraged by the latest Baker Hughes rig count report on Friday, which showed only a two-unit rise in active US oil rigs to 765. The weekly pace of rig additions has now slowed for a fifth month in a row. In March, 53 rigs were added, or about 11 per week. In April, 35 were added, or nine per week. And in May, 25 were added, or six per week. In June, only 23 units were added (the lowest rate of the year), with the pace of rig additions falling to five per week and the first two weeks of July showing a nine rig gain (4.5 per week). However, this did not impact the crude output figure, which last week broke out of the 9.25-9.35 mln bpd range where it had been stuck since early May and is now at 9.4 mln bpd. Although the pace of rig additions has come down, the massive additions in recent months mean that we are still looking at production growth over the next five or so months even without a further rise in the count.
> Gold prices shoot up on weak CPI and gloomy rate hike prospects. Gold prices started to tick higher around the middle of the day on Friday, gaining as much as $5/oz prior to the CPI data release and another $10/oz after the numbers were published and reaching as high as $1,232/oz. Prices have stabilized within the $1.228-1,232/oz corridor since then and are currently hovering just above the $1,230/oz level. The US consumer price index was expected to remain flat over June but eased 0.3 pp to 1.6% y-o-y from 1.9% in May. The core index, which excludes food and energy, rose 0.1 pp to 1.7% y-o-y, versus the 0.2% forecast increase. The Fed's inflation target is 2% and it follows the core PCE index, which is currently at just 1.4% y-o-y, so the latest CPI data provides very little support for another rate hike this year. The probability of this happening is highest in December but is now below 40%. This leaves investors even more puzzled over the scale of US economic growth this year and throws a question mark over the necessity of hiking rates one more time this year, easing the pressure on non-yielding securities such as gold. We think the CPI data has put a strong floor under gold prices at $1,200/oz, supported by the current YTD DXY lows and recent retreat in the benchmark US 10y Treasury yield.