Commodities. Oil and Gold Daily - June 19, 2017

> US oil rig count continues to grow despite lower prices. Brent August futures gained almost $0.8/bbl during the first half of the day on Friday, reaching $47.6/bbl, but the upward move was not sustained, and the front-month Brent contract eventually settled at $47.37/bbl, up $0.45/bbl on the day. The latest Baker Hughes report showed a six-unit rise in the active US oil rig count, to 747, in the week ending June 16. The pace of rig additions, which has slowed over the last few months, is set to recover in June. In March, 60 rigs were added, or about 12 per week; in April, 35 were added, or around nine per week; and in May, 25 were added, or about six per week. However, 25 units have already been added in June (the same as in the entire month of May), and there are still two weeks to go. The pace of rig additions in June is currently around eight per week, significantly higher than in May, which is interesting, since the oil price fell around $4.5/bbl during the first half of the month. This points to a strengthening US shale industry. It is also important to note that there is about a five-month delay between when a rig is brought online and when the output from that rig shows up in production figures. This means that an oil rig added today will start contributing to production growth in about 20 weeks. If this pattern holds, we are in for another five months of US supply growth, no matter where the oil price is headed during the rest of the year.
Longer-term, however, US shale firms could encounter difficulties due to the scaling-back of their hedging programs in 1Q17, which was recently reported on by Reuters. This was driven by bullish 2H17 price expectations. Producers delayed their hedging in hopes of locking in higher prices. However, these bullish expectations have so far failed to materialize, leaving producers exposed to volatile and currently low spot prices, which are now close to the average breakeven levels for most shale basins. This factor could potentially hinder US oil production growth next year.
> Gold prices are falling despite a weaker dollar. On Friday, gold held at around $1,255/oz throughout the day and failed to rise on a material correction in the dollar. Today gold is trading even lower, holding just above the key $1,250/oz support level, while the DXY index has recovered slightly. This means that the precious metal is currently vulnerable to a correction. Today all eyes will be on a roundtable meeting led by New York Fed President William Dudley. The tone of his post-meeting comments could help determine the future direction of the dollar as well as gold. We think there is a good chance that Dudley (a close ally of Fed Chair Janet Yellen) will be hawkish today despite the recently weak economic data, which undermines the Fed's ability to follow through on its rate hike plans for 2H17. If Dudley expresses a hawkish viewpoint, we would expect gold to remain under pressure and hold in a range of $1,240-1,250/oz for the rest of the week.