Commodities. Oil and Gold Daily - July 3, 2017

> Oil prices up on dip in US rig count... The new front month Brent September futures were trading steadily near $48/bbl early in the day on Friday. The price later stepped up by about $0.8/bbl to settle at $48.77/bbl, up $1.14/bbl on the day. It is trading close to $48.9/bbl this morning.
Investors have gotten accustomed to the Baker Hughes rig count reports showing a steady rise in active US oil rigs. The reports have rarely impacted prices. Last Friday, however, was a different story, when the first weekly decrease in active rigs since early January was recorded. The count fell by 2 rigs to a total of 756. This means that the weekly pace of rig additions has now actually slowed for the fourth 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 of the year), with the pace of rig additions falling to five per week, which directly correlates with the almost $7/bbl drop in Brent in the first 14 trading days of the month. Prices have been very sensitive to this bullish data, as investors have linked the lower rig count with the last EIA weekly report, which showed a sharp reduction in the pace of US domestic crude oil production (down 0.1 mln bpd to 9.25 mln bpd). The crude output figure finally broke out of the 9.30-9.34 mln bpd range last week, where it had been stuck since early May and has now retreated back to the level last seen in mid-April. We, however, do not see this as a sign of falling US shale production growth; rather we attribute it to a tropical storm in the Gulf of Mexico, which did not impact crude imports but halted deep-water operations. Another factor is maintenance in Alaska. The latest decrease in the rig count, meanwhile, will not slow US oil production in the short term. Even though Friday's report showed a decrease, the massive additions of rigs in recent months means that we are still looking at production growth over the next five or so months.
> ...but remain indifferent to rising OPEC production. Over the last two months, oil prices have reacted negatively to the publication of preliminary OPEC production data. Since April, output has been increasing at a solid pace, driven by Libya and Nigeria. A recent Reuters survey showed that the total crude output of member countries (including those party to the cut deal and those not) had increased even more, from 32.44 mln bpd in May to 32.72 mln bpd in June. Although the survey also showed that compliance among countries obliged to cut output remains high (dipping slightly from 95% in May to 92% in June), market players are tending to focus mainly on the output increases in Libya and Nigeria. Gains in these two countries have been what is behind the surge in OPEC production, and over the last two months have offset about half of OPEC's 1.2 mln bpd production cut. On Friday, however, we saw no negative price reaction to this bearish data, meaning that the market is currently preferring the bullish developments and upward price momentum. Further assessments of OPEC's June production by the OPEC Secretariat and IEA will be published in their monthly reports, which are due on July 12 and 13, respectively.
> Slight rebound in dollar pushes gold even lower. The gold price ended Friday at the lower end of the intraday $1,240-1,248/oz trading range, but has broken below $1,240/oz support this morning to hit $1,234/oz. The drop comes amid a slight rebound in the DXY, which started moving higher on Friday from the 95.5 mark and is currently close to 95.9. Sentiment is currently dominated by the belief that the era of cheap money is coming to the end, as many Western central banks last week pointed strongly to an end to the post-crisis quantitative easing programs and are eying a rebound in interest rates. This is forcing investors out of gold and into yield-generating securities, such as Germany's benchmark 10y bonds, which last week showed the strongest weekly gains since 2015. US consumer spending data (two thirds of US economic activity) showed a 0.1% m-o-m increase in May, which points to the fact that the US economy picked up steam in 2Q17. The Fed's favorite inflation measure, the Core PCE Index, fell to just 1.4% in May, down from the 1.8% in January and February and 1.5% in April. This means that the Fed is still left with the same problem of inflation lagging behind what is believed to be strong economic growth. This makes a Fed rate hike in September very debatable.