Commodities. Oil and Gold Daily - June 27, 2017

> Oil claws back early losses; hedge fund sentiment worsens. During Asian trading yesterday morning, Brent for August delivery gained almost $0.5/bbl, but the gains were not to last, as it retreated by mid-day by $1.1/bbl to $45.11/bbl. It managed to then hold above the recent $45/bbl support level, rebounding strongly to settle at $45.83/bbl, up $0.29/bbl on the day. The upward momentum carried over to today and Brent was trading near $46.2/bbl this morning.
While prices are trying to find their floor, the latest CFTC data, for the week to June 20, when Brent lost around $3/bbl, showed that hedge funds' bearishness had only intensified. They continued to build short positions for the third week in a row while liquidating long positions for a fourth consecutive week. Given the current positioning, we think volume-wise there is an overhang of shorts, with not many longs left to be closed. At some point these short positions (which were borrowed) will need to be bought back, which will support prices.
Net long positions in WTI and Brent futures and options fell 109 mln bbl to 389 mln bbl, according to the CFTC data. On the ICE and NYMEX exchanges, long positions edged down 63 mln bbl to 746 mln bbl, while short positions increased by 46 mln bbl to 357 mln bbl. The ratio of long to short positions came down from 3 to 1 three weeks ago to 2.6 to 1 two weeks ago, and then to 2.1 to 1 last week, well below the late-February peak of 10.3 to 1. In mid-February, shorts stood at a YTD-low 102 mln bbl, while long positions reached a YTD-high of 1,054 mln bbl.
> Gold rebounds from setback ahead of Yellen speech. Yesterday gold prices plunged $16.5/oz, dropping from $1,254.5/oz to as low as $1,238/oz. This included a sharp $10/oz decline within a matter of minutes around 11:00 Moscow time, when about 18,500 lots of gold were sold (1.85 mln ounces). This move was not driven by a major data or news release, but rather by a major market player's mistake (the volumes were quickly bought back). The sharp drop was fueled by a lack of liquidity on the back of low trading activity in Asia due to holidays and London trading having just started.
Gold has almost fully recovered from yesterday's setback this morning to trade near $1,253/oz. The markets are waiting for Fed Chair Janet Yellen's speech on the global economy at London's Royal Academy at 20:00 Moscow time. Investors anticipate that Yellen will provide more details on the Fed's current view on monetary policy. The consensus is that she will express an upbeat view on the US economy and the prospects for further rate hikes this year. We agree with this view and see gold retreating to $1,240-1,250/oz after the speech.
> Hedge funds continue to become more gold-bearish. CFTC data for the week to June 20 (after the Fed hiked rates, and when gold fell by almost $25/oz), indicates that sentiment among hedge funds continued to deteriorate. Money managers continued to cut long positions, leaving shorts mainly unchanged. The story this tells is that hedge funds executed speculative bullish trades prior to the Fed meeting and took profits after the Fed had delivered a less dovish outlook on the US economy along with its rate hike. The net long position fell by 49,680 lots. Long positions were down by 49,827 lots, while short positions were down by a negligible 147 lots. Given the positioning in gold - a 2.6 to 1 ratio of long to short positions (compared with 3.9 prior to the June Fed meeting) - there is still room for long positions to be liquidated, which means that gold could potentially be pushed down to the $1,230-1,240/oz range.