Commodities. Oil and Gold Daily - June 15, 2017

> EIA inventory data delivers yet another blow to oil prices. Brent August futures were trading at $48.1-48.6/bbl yesterday morning after bearish API data late on Tuesday forced them to retreat close to the $48/bbl support level. Later in the day, the weekly EIA crude oil and refined products inventory data in the US forced Brent to sink $1.6/bbl to as low as $46.85/bbl. Last week, the Brent August contract also fell $1.6/bbl after the EIA weekly data release. Yesterday, the front-month contract eventually settled at $47/bbl, down $1.72/bbl on the day.
The EIA reported a 1.66 mln bbl drop in crude inventories to 511.5 mln bbl for the week to June 9, falling short of the Bloomberg median estimate of a 2.45 mln bbl decline and diverging from the 2.8 mln bbl increase registered by the API the day before. The EIA report also showed a w-o-w decrease in US crude imports, which fell 0.32 mln bpd to 8 mln bpd, with the biggest weekly decrease coming from Iraq, OPEC's second largest member in terms of production (in the week to June 2, the US imported a near record volume from Iraq). Substantial exports from Iraq to the US is an especially bearish factor given the fact that market players expect OPEC exports to fall on the back of the production cuts. Supporting the weekly drawdown was a w-o-w increase in exports (by 0.17 mln bpd to 0.72 mln bpd), with a slight increase in domestic refinery inputs (by 0.03 mln bpd to 17.26 mln bpd) also providing a helping hand. These three factors contributed to the w-o-w decrease in crude inventories and offset a weekly increase in US crude production (by 0.012 mln bpd to 9.33 mln bpd), which has effectively been stuck within the 9.3-9.34 mln bpd range since early May.
The biggest blow to oil prices came from the refined products data and from gasoline in particular. Gasoline inventories registered a w-o-w increase of 2.1 mln bbl, above the 1.8 mln bpd gain reported by the API the previous day and well above the Bloomberg consensus (1.1 mln bbl build). Weekly gasoline demand continued to ease and is now at 9.27 mln bpd, down a whopping 0.5 mln bpd y-o-y. Market players fear that given the exceptional strength of refinery runs this year, low end-user demand could lead to significant overstocking. Distillate inventories rose 0.33 mln bbl, while the market had expected a 0.5 mln bbl rise.
End-user demand is key as it determines the level of refinery runs, which in turn determine demand for crude oil. The scale of the decline in gasoline demand is indeed worrying, especially compared with levels seen last summer, when it held very steady at around 9.7 mln bpd. We think that until there is a significant improvement to at least above the 9.5 mln bpd mark, crude oil prices will remain under severe pressure in w-o-w terms.
> US inflation and Fed meeting results pulled gold in opposite directions. US inflation and retail sales data initially drove the gold price $13/oz higher to near the $1,279/oz mark, with investors then waiting for the outcome to the Fed meeting and Yellen's tone at the subsequent press conference. The US CPI eased 0.1% m-o-m in May driven by a drop in retail motor fuel prices; analysts had expected the index to remain flat. The core CPI, which does not include food or energy, rose 0.1% m-o-m in May. Both measures continued to underperform y-o-y, with the CPI up by 1.9% versus the forecast of 2.2% and the core CPI up 1.7% y-o-y versus 1.9% expected. The data disappointed investors, raising doubts over the economic improvement, which resulted in a selloff in the dollar and a subsequent rise in the gold price.
As expected, the Fed hiked rates 25 bps to 1.25%, and gold retreated by $5/oz later in the day. The price has fallen another $14/oz since Yellen's press conference, settling within the $1,260-1,265/oz range, where it currently remains. Most FOMC members expect another hike this year, taking the rate to 1.375%. The market is currently pricing in a 50% probability of this materializing in September. The Fed said near-term risks to the economic outlook appear roughly balanced, pointed to the strength of the labor market and announced plans to cut its bond holdings this year. This provided strong support for the dollar, as the Fed has now become less dovish than was expected.