Commodities. Oil and Gold Daily - July 27, 2017

> EIA reports inventory draws, keeping Brent above $50/bbl. The Brent September contract largely held stable yesterday despite the release of EIA inventory data. It stayed within the $50.3-51.1/bbl range throughout the session, though straight after the data was released it initially attempted to break above $51/bbl, failed and rapidly retreated to $50.4/bbl. The data was generally bullish and helped Brent to end $0.77/bbl higher on the day at $50.97/bbl. It is hovering close to the $51/bbl mark this morning.
The EIA reported a 7.2 mln bbl draw in US crude inventories to 483.4 mln bbl in the week to July 21, compared with Bloomberg's forecast of a 3 mln bbl decline and the 10.2 mln bbl draw to 487 mln bbl reported by the API the day before, taking the gap between the two to 3.6 mln bbl. The major contributor to the drawdown was a strong 0.3 mln bpd increase in exports to 1.03 mln bpd, supported by improving arbitrage opportunities to ship US crude to Asia and permitted by a sufficiently wide WTI discount to the Dubai benchmark. Domestic refining inputs were also supportive, rising 0.16 mln bpd to 17.28 mln bpd driven by strengthening demand for refined products, with peak season expected to last for the rest of the summer prior to seasonal maintenance in the autumn. US domestic crude oil production edged down by 0.019 mln bpd to 9.41 mln bpd driven by seasonal maintenance in Alaska. Imports rose 0.048 mln bpd to 8 mln bpd, but this was not strong enough to offset the inventory drawdowns. Importantly, imports were driven higher by Saudi Arabia and Iraq.
Gasoline stocks fell 1 mln bbl w-o-w, falling short of the 1.8 mln bbl Bloomberg estimate and contradicting the 1.9 mln bbl increase reported by the API the day before. Total US gasoline stocks have now eased 11 mln bbl y-o-y, with demand showing a significant improvement over the surprise figure seen in June but falling just short of the historic highs seen late in May. Distillate inventories fell 1.8 mln bbl, versus the Bloomberg estimate of a 0.5 mln bbl rise, a result that also exceeded the API figure of a 0.1 mln bbl draw.
We remain firm in our view that given the $3/bbl gain in Brent over the past three days, the market is not exposed to a potential price correction through profit-taking. Yesterday's choppy performance following the bullish EIA report implies that the market was ready to correct, in our view, but the data did not provide any bearish developments for market players to pick up on. For Brent to hold above $50/bbl, the market needs to be free from bearish developments for at least a week to allow sentiment to improve and the discussion over what is now a more balanced market to start to intensify. The next big test will be the July OPEC production figures by Reuters on July 31 or August 1, which will certainly indicate an increase m-o-m. On the other hand, weekly US inventory data is likely to continue to be supportive for the rest of the summer.
> Gold prices emerge victorious after Fed meeting. Gold prices fell as low as $1,245/oz early yesterday in a continuation of the picture set on Tuesday. The downtrend was turned around by the outcome to the Fed meeting, especially by the accompanying statement. As expected, rates were left on hold, and the statement did not significantly deviate from previous ones. However, one modification to the statement paved the way for gold to rally to $1,262/oz later in the day. The Fed had previously stated that inflation is running "somewhat" below 2%, but it deleted that word in the latest iteration so now, firming the statement that it is running below 2%. Given how carefully the Fed chooses its wording, market players instantly started to price in this new, slightly more dovish statement, which took the dollar index and US Treasury yields lower, with safe-haven assents such as gold emerging victorious, as we had anticipated. A year-end rate hike is definitely now a bigger unknown than a month ago, with the Fed left watching for inflation data to see if it will approach its 2% target. For the rest of the week, we see gold correcting to the $1,255-$1,260/oz range, driven by a stronger dollar (for more details see our latest Russia FX Beat).