Commodities. Oil and Gold Daily - June 20, 2017

> Oil prices under pressure as likelihood of Libya joining OPEC cuts is falling. Yesterday saw a similar pattern to Friday, with Brent August futures gaining almost $0.6/bbl during the first half of the day to reach the $47.7/bbl mark but falling back to $46.91/bbl to finish down $0.46/bbl on the day. Pressure emerged after the publication of an interview with Saudi Energy Minister Khalid al-Falih, who said that it would be "inappropriate" to pressure Libya into slowing its production recovery. Although al-Falih stressed that a rise in Nigerian and Libyan production this year should not be considered a threat to the OPEC output cut deal, market players clearly see the situation differently. Combined crude oil production from these two countries rose by a staggering 1.1 mln bpd y-o-y in 5m17. This growth picked up pace significantly in May, when combined Nigerian and Libyan output was up another 0.7 mln bpd y-o-y, as oil field maintenance in Nigeria and disruptions in both Libya and Nigeria eased. The market consensus is that until Libya and Nigeria are brought into the deal, the chances of seeing backwardation in Brent (implying a structural deficit on the market) are low, with the two countries looking to add about 0.5 mln bpd of combined production this year on top of the October 2016 production cut baseline level.
> Hedge funds' bearish sentiment firmly entrenched. CFTC data for the week to June 13, when Brent August futures lost almost $2/bbl, indicates that hedge funds continued to build short positions while liquidating long positions for a third week in a row. This suggests that sentiment among money managers has switched from cautious to bearish. Given current positioning, we think volume-wise there is an overhang of shorts, with not many longs left to be closed, meaning that hedge funds will no longer be able to exert strong pressure on prices over the short term. This suggests that Brent is strongly supported above $45/bbl.
Net long positions in WTI and Brent futures and options fell 51.5 mln bbl to 498 mln bbl, according to the CFTC data. According to ICE and NYMEX data, long positions edged down 6.4 mln bbl to 809 mln bbl, while short positions increased by 45.1 mln bbl to 310 mln bbl. The ratio of long to short positions came down from 3 to 1 the week before to 2.6 to 1 for the latest week, well below the late-February peak of 10.3 to 1. In mid-February, shorts stood at a minimum 102 mln bbl, while long positions reached a maximum of 1,054 mln bbl. The current lower ratio suggests the market is indeed skewed towards the bearish side, meaning that there is even more potential for oil prices to rise if money managers start building long positions again. Current positioning indicates that there is plenty of room for this. We previously thought that this scenario could materialize in July on the back of US inventory drawdowns, driven by lower imports from OPEC and an increase in exports; however, the recent surplus of light crude on the market means the US exports will struggle in the upcoming month, shifting our inventory draw forecast to August.
> Gold price slides on hawkish Fed. The gold price dropped throughout yesterday's session, losing $12/oz to drop as low as $1,243/oz, though we have seen a slight rebound this morning, by $3/oz to just above $1,246/oz. As we expected, New York Fed President William Dudley was in fact hawkish on interest rate hikes in a speech yesterday. He said sluggish inflation continues to leave investors guessing over the actual pace of economic growth this year, but he downplayed the risks, saying that inflation is a bit low but should rebound along with wages on the back of the strong labor market. The comments strengthened market expectations that the current weak data is unlikely to change the Fed's plans to hike rates once more this year. Fed Vice Chairman Stanley Fischer did not discuss interest rates in his speech yesterday. We think gold will remain at the lower end of the $1,240-1,250/oz range, pressured by a firmer dollar.
> Hedge funds cut long positions and built shorts in gold prior to the Fed hike. CFTC data for the week to June 13, when gold fell by almost $34/oz, indicates that sentiment among hedge funds changed sharply in the buildup to widely expected Fed rate hike. Net long positions fell by 19,621 lots. Long positions were down 15,842 lots, while short positions were up by 3,779 lots. This latest positioning and the ratio of long to short positions of 3.1 to 1 (compared with 2.1 to 1 in mid-May) indicates that there is still room for more long positions to be liquidated, which could potentially push gold down to the $1,230-1,240/oz range.