Commodities. Oil and Gold Daily - June 29, 2017

> Oil prices react positively to EIA data for first time in five weeks. Brent August futures continued to moved decisively higher yesterday, gaining almost $0.6/bbl after the weekly EIA data was released and closing $0.66/bbl higher at $47.31/bbl. This morning, the August front-month contract is trading around $47.5/bbl. The EIA reported a 0.118 mln bbl increase in US crude inventories to 509.2 mln bbl in the week to June 23, versus a 2.2 mln bbl decline forecast by Bloomberg and a 0.85 mln bbl rise reported by the API the day before. The increase was driven by a 0.14 mln bpd w-o-w rise in crude imports (to 8 mln bpd), with the biggest increases coming from Iraq and Nigeria. The inventory increase was also driven by a 0.26 mln bpd drop in domestic refinery inputs to 16.89 mln bpd. After reaching a record 17.51 mln bpd in late May, refinery runs have been steadily falling, putting pressure on inventory levels. Export levels edged up 0.01 mln bpd in the week to 0.53 mln bpd, with the total volume remaining below 1 mln bpd for a fourth straight week as weak demand for light sweet crude is stopping excess oil stocks being drawn out of the US. Offsetting the weekly drawdown and also fueling bullish sentiment was a sharp reduction in the pace of US domestic crude oil production, which fell 0.1 mln bpd to 9.25 mln bpd. The crude output figure finally broke out of the 9.30-9.34 mln bpd range last week where it had been stuck since early May and has now retreated back to the level seen in mid-April. This could be viewed as a sign of falling US shale production growth, but we think this is not the case; rather, we attribute this to Tropical Storm Cindy in the Gulf of Mexico, which did not impact crude imports but halted deep-water operations. The lower production can also be contributed to maintenance works in Alaska.
Gasoline demand fell again during the reported week, retreating 0.28 mln bpd to 9.54 mln bpd and remaining counter-seasonally weak. Gasoline inventories fell 0.89 mln bbl w-o-w, contradicting the 1.34 mln bbl gain reported by the API and the Bloomberg median consensus estimate of no change. Distillate inventories were down 0.22 mln bbl, also contradicting the 0.68 mln bbl gain reported by the API and the Bloomberg median consensus estimate of a 0.9 mln bbl rise. Distillate demand fell 0.13 mln bpd to 4 mln bpd. The decrease in refined product stocks was largely driven by the recent ease in refinery runs.
Bearish sentiment has had markets concentrating on bearish figures lately, especially since they have been counting on the long-awaited rebalancing to occur this year. This time traders concentrated on a single bullish takeaway (US production) to drive the price up. Should the weekly data show a sharp increase in US production, it is hard to see where bullish momentum might come from to challenge this. The price reaction after the latest report shows that the bearish sentiment could in fact be changing, as prices currently appear to be more willing to recover.
> Gold still brushing off dollar weakness. Gold traded in the $1,246-1,253/oz range yesterday and settled at around $1,250/oz later in the day. This morning, gold is trading lower, looking to break the $1,245/oz support level. Meanwhile, the dollar index continues to slide, which usually triggers an upward move in gold. However, this has not happened this week, with trading sideways in the $1,240-1,253/oz corridor since late Tuesday while DXY has dropped from 97.4 to 95.7 this morning.
The dollar was dealt another setback on Tuesday by a strengthening euro, as there have been signals that the ECB is preparing to taper its monetary stimulus program. Also, BoE Governor Mark Carney said yesterday that he sees a need to hike rates, further fueling expectations of tighter monetary policy across Europe. We think gold is currently less sensitive to the weak dollar as it is being capped by the soaring US stock market.