Commodities. Oil and Gold Daily - June 16, 2017

> Oil prices take a breather following Wednesday's sharp drop. Prices were relatively stable yesterday after slumping $1.6/bbl on Wednesday to just below $47/bbl following the publication of bearish weekly EIA crude oil and refined products inventory data for the US. Yesterday, Brent August futures continued to trade around the $47/bbl mark and eventually settled at $46.92/bbl, down just $0.08/bbl on the day. Investors took a pause to gauge whether the price has reached a bottom and whether this is the right time to invest in oil, especially given the recent U-turn in dollar momentum following the Fed 25 bp rate hike to 1.25%. A weaker dollar means that oil becomes less expensive for investors holding other currencies, potentially encouraging investment in this dollar-traded commodity. Both oil and the dollar have effectively been trending lower since early March and have reached YTD lows this month, so oil is currently offering its best value this year, especially for investors holding other currencies. We think speculative buying on the back of this factor could provide short-term support to oil prices given the increasing possibility of further dollar index strengthening.
> Libya continues to inject bearish sentiment. Today, investors will be digesting the latest developments in Libya. National Oil Corporation has said it expects Libyan production to rise to 1 mln bpd by August, a level not seen since June 2013. Developments in Libya are critical for market sentiment at present, as in May alone, the simultaneous recovery in Libyan and Nigerian production added 0.33 mln bpd to the market, compounding the output situation. Libyan production currently stands at 0.83 mln bpd, with exports rising to about 0.72 mln bpd. We had assumed that Libyan oil production would average 0.75 mln bpd this year, but a recent interim deal between NOC and Wintershall and the subsequent restart of several fields means that Libya is now very likely to raise output further, while Nigeria is strongly pushing toward the 2 mln bpd level. Although production growth is fragile in these two countries, we think OPEC will have to bring them under the production cut deal. Unless this is done, the chances of seeing backwardation in Brent (implying a structural deficit on the market) are low.
> Gold continues to ease, mirroring the DXY. Gold prices continued to decline yesterday. The slide started on Wednesday evening straight after the Fed hiked rates, stated that 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. Most FOMC members expect another hike this year. Yesterday, gold sank almost $15/oz to $1,255/oz, where it is currently trading. The drop was driven by strong US employment data, which is currently under the spotlight as investors are anticipating and encouraging the Fed to hike rates once more this year. Initial claims fell for a second week in a row, retreating 8,000 to a seasonally adjusted 237,000, versus the consensus forecast of 242,000. Weekly jobless claims were below 300,000 for a 119th consecutive week, indicating a tight labor market and a healthy economy. Industrial production and retail sales were disappointing, however. Sluggish inflation continues to leave investors guessing over the magnitude of economic growth this year, which constraining the dollar.
Annual inflation has now declined for three months in a row, with the Personal Consumption Expenditures price index (PCE) falling to 1.7% in April and core PCE (excluding volatile food and energy prices) hitting 1.5%, below the Fed's 2% inflation target. Today we think gold will nudge up toward $1,260/oz on the back of dollar weakening driven by US housing starts and consumer sentiment data.