Commodities. Oil and Gold Daily - June 30, 2017

> Oil prices firm amid expected dip in Iranian exports in July despite rise in Libyan production. Brent August futures (which expire today) started trading yesterday at around $47.50/bbl, rose to as high as $48/bbl midday before retreating to settle at $47.42/bbl, down $0.11/bbl on the day. The Brent September contract, which will become the front-month contract on Monday, settled at $47.63/bbl, $0.21/bbl above the July contract and is trading close to $48/bbl this morning.
According to Reuters, citing sources with inside knowledge, Libyan oil production is currently very close to reaching the 1 mln bpd target that the state-owned oil company had aimed to achieve by August. This is a level not seen since June 2013. Output has increased by almost 0.02 mln bpd this week and is currently around 0.95 mln bpd. Before the uprising in 2011, Libyan oil production was fluctuating at around 1.6 mln bpd but has been fragile since then due to constant blockades of the oil infrastructure. The scale of the recovery in Libyan production has been one the most unexpected bearish development on the oil market this year. Production averaged 0.33 mln bpd during the first five months of last year, but doubled that to reach 0.66 mln bpd over the same period this year. Although production growth is still fragile, we think OPEC will have to bring Libya into the production cut deal if the market is to be rebalanced this year. If it does not, the chances of seeing backwardation in Brent (implying a structural deficit on the market) are low.
This month, Iranian exports totaled 2 mln bpd but in July are expected to decrease by 0.14 mln bpd to 1.86 mln bpd. This could sound like a strong bullish development, but, given that it is essentially due to seasonal factors, we think that it will only be a short-term factor. Last year, exports dipped last July as well, before returning to previous levels in August.
> Gold prices make no progress despite weaker dollar. Gold underwent a sharp $8/oz midday drop yesterday, from $1,253/oz to about $1,245/oz (at one point retreating to as low as $1,240/oz). This came despite further weakening in the DXY, which started the day at 96 but closed at 95.5. This morning, the DXY is showing slight signs of recovery, while gold seems eager to retreat in the face of the strengthening dollar. It is currently trading close to $1,243/oz.
Gold has been generally less able to benefit from the weaker dollar, as its gains are being capped by the soaring US stock market and higher yields on German bonds and US Treasuries, which in turn are being driven by expectations that central banks on both sides of the Atlantic will taper their monetary stimulus programs and that quantitative easing will be rolled back. A second upward revision of 1Q17 US GDP by 0.2% to 1.4 % Q-o-Q annualized did not reverse the downward trend of the dollar. In any case, the 1Q figure is still below the 2.1% growth in 4Q16. The dollar was also negatively affected by St Louis Fed President James Bullard's comment that he doesn't think anything needs to be done on rates right now. We think that gold might break below the $1,240/oz support level today on the back of the slight move higher in the DXY, as we consider that gold's gains earlier this week were overdone. Today, investors will be keeping an eye on the core PCE inflation data, which we expect to be soft.