Commodities. Oil and Gold Daily - June 23, 2017

> Brent tries to find stability just above $45/bbl. Brent August futures continued to trade around $44.7/bbl yesterday morning after being pushed down to that level on Wednesday by the EIA inventory data. By midday, however, the front-month contract had broken though the $45/bbl barrier and it went on to advance almost $1/bbl from the morning levels. It eventually eased up somewhat to settle at $45.22/bbl, up $0.4/bbl on the day, and is trading at around $45.4/bbl this morning. We think yesterday's upward move was mainly due to technical reasons, with Brent trying once again to find a new floor or technical support level after failing to do so initially at $50/bbl, $48/bbl and then $47/bbl. Pessimists might say Brent still has some way to fall and that the fundamental support level is somewhere in the middle of the$35-40/bbl range, echoing prices seen in 1Q16, when OECD inventory levels were also around 3,000 mln bbl (as they are now) and far from the 2,700 mln bbl equilibrium, and with little prospects of reaching it. We believe the current situation is different, as this year there is still light at the end of the tunnel in the form of the OPEC cuts, which are still significant enough to create a market deficit assuming modest demand growth in 2H17, which would lead to inventory drawdowns and could push Brent to $50/bbl at year end. Market players know this, and we think they will be unwilling to short Brent at $40-42/bbl. There is also a slight possibility that the cuts could be deepened and/or Nigerian and Libyan production regulated and constrained; if so, then investors would start to price in brighter expectations and Brent could quickly rebound to $50/bbl.
> OPEC and non-OPEC allies recognize emergency and start discussions. Despite recent comments from the Saudi energy minister that rising Nigerian and Libyan production should not be considered a threat to the OPEC output cut deal and that the oil market is heading in the right direction (a view with which market players clearly disagree), the production cut signatories have started discussing possible ways out of the current situation. This is clearly a good sign, as it means producers recognize that their goal of rebalancing the market is under serious threat. Talks this week in Vienna are focusing on how to deal with rising Libyan and Nigerian production. Deeper cuts have been mooted but are clearly the least favorable option, and they elicited no consensus. This ties in with our $40-42/bbl Brent floor assumption, as the more of these meetings that take place, the closer the deal signatories will get to actually deciding on the need to limit Nigerian and Libyan production, in our view.
> Elevated risk and uncertainty favor gold. The gold price climbed as high as $1,255/oz yesterday but quickly retreated to $1,248/oz as soon as the dollar index began to stabilize. This could indicate that investors are tilting towards riskier securities. However, developments this morning show that it is too early to give up on safe-haven assets such as gold, which has jumped back to $1,254/oz. North Koreas is once again under the spotlight after testing a rocket engine that could form part of an intercontinental ballistic missile, according to the US. Meanwhile, Turkey is supporting Qatar and has sent food aid to the country, which has seen its economic ties cut by Saudi Arabia and other Middle Eastern countries. Although Turkey's president has held talks with Saudi Arabian leaders to reduce regional tension and his spokesman has stressed that Turkey was not seeking to ratchet up the conflict by supporting Qatar, investors have still interpreted the development as high political risk and have become more risk-averse, which should support gold. A raft of US economic data will come out next week and dictate the direction of the gold price. These include the consumer confidence indicator, pending home sales, revised 1Q GDP and the PCE price index.