Commodities. Oil and Gold Daily - July 28, 2017

> Rig count data could push Brent toward $52/bbl. The Brent September contract traded around $51/bbl early yesterday and gained momentum later on, closing at $51.49/bbl, up $0.52/bbl on the day. The Brent October contract, which becomes the front-month gauge on Tuesday, is just $0.01/bbl above the September contract this morning. Weekly Baker Hughes rig count data is due today at 20:00 Moscow time. Last week's data was encouraging for oil bulls, showing a one-unit fall in active US oil rigs, to 764. However, this failed to offset the impact of a forecast based on ship-tracking data from Petro-Logistics. The consultancy firm predicted that OPEC crude output would rise by 0.145 mln bpd in July, which would put output above 33 mln bpd, around 0.6 mln bpd higher than the 1H17 average. This resulted in a $1.24/bbl slide in Brent last Friday.
The weekly rig count data rarely has a strong impact on prices, but we think today could be a different story, since there are no potentially bearish releases on the agenda, which means that another batch of upbeat data could nudge Brent toward $52/bbl, $4/bbl above where it began the week. For this to happen, the data would have to confirm the trend of slowing rig additions that started five months ago. In our view, even a three-unit increase in the US rig count would do the trick, as it would put the average pace of rig additions in July at three units per week, compared with five in June, six in May, nine in April and eleven in March.
This slowdown owed partly to a rise in drilling costs in 2Q17, the first quarterly increase since 1Q14, according to data from the US Bureau of Labor Statistics. This year drilling costs were slow to react to the rapidly rising rig count, as machinery owners were fiercely competing for contracts back in 2016, when the industry was less healthy amid lower oil 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 strong production growth for the next five or so months, even without further increases. This factor combined with the latest Bloomberg Intelligence data, which shows that only 7.6% of oil volumes are currently hedged in 2018, compared with 30.1% in 2017, could come into play next year, undermining hopes for a surge US crude production growth.
> Gold falls below $1,260/oz as dollar and Treasuries gain; US GDP in focus. During the first half of the day yesterday, gold resisted the dollar's steady gains as Treasury yields traded sideways. Bullion later fell from its $1,260-$1,265/oz range to break below support at $1,260/oz as the DXY breached the 94 mark, up from 93.2 at the start of the day. The surge in the dollar came as investors digested the Fed's statement, which said that its balance sheet reduction would start "relatively soon," which market players interpreted as meaning in September. If this turns out to be the case, it would be a bearish development for gold, as the dollar would strengthen on the rise in long-dated bond yields.
Today all eyes will be on the first 2Q17 US GDP data, due at 15:30 Moscow time. Analysts expect a 2.7% increase, versus the rather low 1.4% 1Q17 reading. We think there is a good chance today's GDP figure will disappoint, fueling demand for safe-haven assets. However, this could also turn the Fed more dovish, reducing the chances of another rate hike this year. As for today, we still see gold ending the week at $1,255-$1,260/oz and believe a weak GDP print could push bullion to the upper end of this corridor later in the day.