Commodities. Oil and Gold Daily - July 24, 2017

> Oil prices sink on expected OPEC production growth in July. Brent for September delivery was trading within a range of $49.3-49.6/bbl at the start of the day on Friday. It then started to slide mid-day and eventually settled at $48.06/bbl, down $1.24/bbl on the day. The losses are attributable to the forecast based on ship-tracking data made by Petro-Logistics, a consultancy firm, that OPEC's crude output will increase by 0.145 mln bpd in July. Weaker compliance to the production cut deal by Saudi Arabia and UEA, as well as increased production in Nigeria, which is not obliged to cut, is the driver behind the increase. The overall figure is expected to exceed 33 mln bpd, above the 1H17 average by 0.6 mln bpd. The most recent figure released by OPEC (based on data collected by secondary sources) shows that production in June stood at 32.611 mln bpd, below Petro-Logistics' estimate for that period. The bigger story, though, is the upward trend in production, which could undermine OPEC's goal of rebalancing the market. The next important assessment of July production across OPEC will be published by Reuters on July 31-August 1. In our view, it is likely to support Petro-Logistics' findings and push prices lower.
Today, the market's attention will be focused on the Joint Ministerial Monitoring Committee (JMMC) meeting in St Petersburg. It could go a long way to determining which side of the $50/bbl mark Brent will trade on for the rest of the summer. Our take is that the meeting will not result in any specific recommendations for OPEC, i.e. production cut targets for Libya and Nigeria; the committee is more likely to simply recommend that OPEC should take action to moderate crude production in the two countries. Absent a bullish surprise, the meeting will most likely pressure prices. We continue to stick to our view that the market is not yet ready to trade Brent above $50/bbl and see resistance at that level as strong.
> Rig count decrease unable to reverse falling price. The latest Baker Hughes rig count report, released on Friday, was encouraging to oil bulls but failed to offset the impact of the Petro-Logistics forecast. The number of active US oil rigs decreased by one to 764 in the week ending July 21. This was in line with the trend of slowing growth in rig additions, which started five months ago and contributed to a rise in drilling costs in 2Q17, the first since 1Q14, according to government data. Drilling costs have reacted slowly to the rapid rise in the rig count as machinery owners, who had been fiercely competing for contracts last year, when the industry was less healthy amid lower oil prices, have been slow to raise prices. Although the growth in rig additions has slowed, the large increase in the number of rigs recorded since 3Q16 means that the market is still faced with production growth for the next five or so months, even without further increases.
> Gold prices end the week on a positive note. On Friday, gold steadily ascended, climbing nearly $12/oz from its opening level of $1,244/oz to close near the $1,256/oz mark. This move was largely driven by a weakening dollar - the DXY index moved close to a 13-month low - and falling US treasury yields, which were in turn triggered by continued political turmoil in the US. On Friday, White House spokesman Sean Spicer resigned, with Anthony Scaramucci, a Wall Street financier and entrepreneur, taking over. Spicer's rather abrupt resignation emphasized the level of tension within the current administration, which remains under fire due to the ongoing investigation into President Donald Trump's alleged collusion with Russia in the presidential election. This week one of the most important events for gold will be the two-day Fed meeting, which starts tomorrow. The tone of the post-meeting statement on the future of interest rates will be the crucial factor. The Fed's inflation target is 2%. The regulator's preferred inflation gauge, the core PCE index, recently printed at just 1.4% y-o-y. Last week's CPI data for June also failed to provide support for another rate hike this year - the core CPI index, which excludes food and energy prices, rose just 0.1 pp to 1.7% y-o-y in June, missing expectations of a 0.2 pp rise.