Commodities. Oil and Gold Daily - July 31, 2017

> US rig count and possible US sanctions on Venezuela buoy oil prices. The Brent September contract gained new vigor around midday on Friday and settled at $52.52/bbl by the close, up $1.03/bbl on the day. The Brent October contract, which will become the new front-month gauge tomorrow, was more interesting, as it started to trade at a discount to September futures on Friday and eventually closed at $52.22/bbl, up $0.7/bbl on the day. Discounts between the second-month and front-month contracts have been rare since mid-2014 (when the oil market became oversupplied), as this short-term backwardated structure implies a tight prompt market.
The latest Baker Hughes rig count report, released on Friday, showed that the number of active US oil rigs increased by two units to 766 in the week to July 28. The front-month contract lost about $0.3/bbl within an hour of the data release (though it recovered all the losses later), but we think the data was encouraging for oil bulls in the longer run, as it confirmed the trend of slowing rig additions begun five months ago. The rig count is considered to be an early indicator of production growth further down the line, and the average pace of rig additions reached only 2.5 units per week in July, compared with 5 in June, 6 in May, 9 in April and 11 in March.
A possible US ban on light crude sales to Venezuela could lead to a lower oil exports from Venezuela, which mixes light oil with its heavy grades. Other mooted measures include a restriction on Venezuelan oil imports to the US (which have averaged 0.7 mln bpd YTD), meaning that Venezuela would have to find another market for 35% of the oil it produces. The US could also limit Venezuelan state oil company PDVSA's access to its financial system, which would complicate operations. The market is now waiting to see which of the above sanctions will be chosen. The import restriction would be the harshest and the one to drive oil prices the most, but any of the above sanctions would be short-term bullish for the oil markets. However, over the longer term, an interruption in PDVSA's production would be bearish, as the company would be forced to undergo massive debt restructuring that would inevitably involve Venezuela unleashing more of its gigantic oil reserves.
> Gold advances on lower probability of US rate hike and tensions over North Korea. By midday on Friday, gold prices were up almost $12/oz at $1,270/oz in the wake of a decline in US Treasury yields and a weakening US dollar index. These moves were prompted by the latest core PCE index report in the US, which indicated a rise of just 0.9% in the Fed's favored inflation measure in 2Q17 following a 1.8% increase in 1Q17. Although US GDP growth was very close to the consensus in 2Q17 (up a strong 2.6% versus a 1.2% gain in 1Q17), low inflation is becoming a stronger factor and could become significant enough to prevent the Fed from hiking rates one more time this year. Gold is also receiving support from a further hike in US-North Korean tensions after the US flew two bombers over the Korean peninsula in a demonstration of strength. The US has urged China, South Korea and Japan to act following North Korea's latest missile tests. Despite these developments, we expect gold prices to consolidate within the $1,265-1,270/oz range at the start of the week on profit taking after breaking slightly above the $1,270/oz level this morning.