Commodities. Oil and Gold Daily - July 18, 2017

> Hedge funds remain cautious, wait for clear price signals in oil. After breaking through resistance at $49/bbl a few times around mid-day yesterday, Brent for September retreated to settle at $48.42/bbl, down $0.49/bbl on the day. Throughout July, Brent has remained locked in a range of $46-50/bbl. The latest CFTC data (for the week to July 11) showed that hedge funds had continued to keep the volume of long positions roughly unchanged for a fourth week in a row while cautiously decreasing short positions for a third week in a row. This bullish shift is by no means significant in terms of volume and was not enough to keep Brent from retreating by $3.4/bbl during that week, from $49.8/bbl to $46.4/bbl. This suggests that short covering (which usually results in an uptick in prices) was balanced out by a substantial number of sellers in the market.
Net long positions in WTI and Brent futures and options increased by 31 mln bbl to 435 mln bbl, according to the CFTC data. On the ICE and NYMEX exchanges, long positions fell by 12 mln bbl to 742 mln bbl and short positions decreased by 43 mln bbl to 308 mln bbl. The ratio of long to short positions increased from 1.95-1 from two weeks ago to 2.4-1 last week, still well below the late-February peak of 10.3-1. In mid-February, shorts stood at a YTD low of 102 mln bbl, while long positions had reached a YTD high of 1,054 mln bbl. Current positioning, specifically the small reduction in the overhang of shorts, implies that hedge funds are slightly more certain that prices will rise, but are still not prepared to put their money behind this expectation yet; instead, they are waiting for clear signals from the market.
> Oil pressured by latest EIA drilling productivity report. The latest EIA drilling productivity report indicated that US tight oil production would increase sharply in August. The EIA expects it to rise 0.112 mln bpd m-o-m to 5.585 mln bpd (total US production stands at 9.4 mln bpd, according to the July 7 EIA inventory report). This will be driven by increased drilling in Texas, where the Permian Basin is expected to contribute 0.064 mln bpd to the increase (to 2.535 mln bpd) and the Eagle Ford region another 0.027 mln bpd (to 1.387 mln bpd). We do not think that crude inventory draws will slow next month if the increase materializes, as it would be counterbalanced by decreased imports from the Middle East on the back of the OPEC-led production cut deal and stronger exports. The latter are likely to hover around 1 mln bpd (up by 0.4 mln bpd from the average June level) thanks to stronger demand for light sweet oil.
> Gold continues to rise on weakening dollar. Gold continued its bullish run, adding $7/oz to trade at $1,236/oz mid-day yesterday, around where it is trading this morning. A further weakening of the US dollar and drop in the US 10y yield drove the gains. Both fading prospects of another Fed rate hike this year and President Donald Trump's diminishing chances of fulfilling his campaign promises on healthcare - certain Republican Senators spoke out against proposed reforms yesterday - have been behind the dollar's recent weakness.
> Hedge funds continue to cut long positions in gold. CFTC data for the week to July 11 (during which gold fell by almost $20/oz to$1,210/oz) indicates that sentiment among hedge funds had continued to deteriorate. Money managers cut long positions for the fifth week in a row, while leaving shorts mainly unchanged for the second week running. This means that hedge funds had executed speculative bullish trades prior to the Fed meeting in June and took profit after the rate hike, particularly given that the likelihood of another rate hike this year remains strong. The net long position for the week to July 11 fell by 10,676 lots (long positions were down by 8,273 lots, while shorts were up 2,403 lots). Given that there is now a 1.3 to 1 ratio of long-to-short positions in gold (versus 3.9 prior to the June Fed meeting), we think that there is currently ample room for a new short-covering rally, especially given the latest bullish developments. This could push gold prices toward the $1,245-1,250/oz range by the end of this week.