Commodities. Oil and Gold Daily - June 26, 2017

> Oil rebounds slightly amid rising US rig count. Brent August futures were trading around $45.5/bbl for most of Friday and eventually settled at $45.54/bbl, up $0.32/bbl on the day. However, this morning the front-month contract has found its way out of the $45-46/bbl range in which it has been sideways trading for the past two sessions. Many are attributing this upward move to short-covering and the dollar index awakening on Friday, which makes oil more attractive for investors holding other currencies. We think there is a big chance that oil prices found a short-term floor at $44.5/bbl on Wednesday last week, and since then they have become more sensitive to bullish factors. In our view, investors will only be willing to sell crude below this level this week if US inventory data turns out to be bearish.
Investors barely heeded Friday's rather bearish Baker Hughes report, which showed an 11 unit rise in the active US oil rig count to 758 in the week to June 23. The pace of rig additions has slowed over recent months but has begun to pick up in June amid weaker prices. In March, 53 rigs were added, or about 11 per week; in April, 35 were added, or nine per week; and in May, 25 were added, or six per week. So far in June, 25 units have already been added (the same number as in the entire month of May), and there is still another week to go. The pace of rig additions in June is currently around eight per week, significantly above the May figure, which is interesting, as the oil price dropped by $4.5/bbl in the first half of the month. It is important to note that there is delay of around five months between when a rig is brought online and when output from that rig shows up in the production figures. We are therefore likely in for another five months of US supply growth, no matter where the oil price is headed during the rest of the year.
Over the longer term, US shale firms could encounter difficulties given that they scaled back their hedging programs in 1Q17, according to a recent report by Reuters. This was driven by bullish 2H17 price expectations. Producers delayed hedging in hopes of locking in higher prices. The latest Bloomberg Intelligence data shows that only 7.6% of oil volumes are currently hedged in 2018 compared with 30.1% in 2017. This means that shale produces are exposed to spot prices, which are currently volatile and low and close to the average breakeven levels for most shale basins. This factor could hinder US oil production growth next year.
> Gold gets ready for data-heavy week. The gold price advanced $9/oz on Friday to peak at $1,259/oz but then retreated to $1,256/oz as soon as the dollar index began to stabilize. It is trading at $1,254/oz this morning. Friday's uptick was driven by comments from St Louis Fed President James Bullard (a non-voting member), who admitted that the Fed is indeed struggling to put a weight on the currently weak inflation figures and expressed the view that further rate hikes should be postponed until it is clear that inflation is starting to support economic growth. A large raft of US economic data will be released this week and will dictate gold price movements: consumer confidence on Tuesday, pending home sales on Wednesday, revised 1Q17 GDP on Thursday and the PCE price index on Friday.