Commodities. Oil and Gold Daily - November 1, 2017

> Oil prices rise on drop in OPEC production in October. The new front-month Brent contract (for January) was trading around the $60.5/bbl mark yesterday morning but closed $0.35/bbl higher at $60.94/bbl. Prices reacted positively to the publication of preliminary OPEC production data for October from Reuters. OPEC production (all 14 members) eased 0.08 mln bpd m-o-m in October to 32.78 mln bpd. As we expected, the drop was largely driven by a reduction in Iraqi output (down 0.12 mln bpd m-o-m), but we think the latter could well see a strong bounce in November if production facilities in and around Kirkuk come back online. Lower Iraqi output also boosted the compliance level for those countries obliged to cut by 6 pp m-o-m to 92%. Libyan production has stabilized since experiencing disruptions (up 0.07 mln bpd m-o-m to 1 mln bpd), while Nigerian output was down 0.07 mln bpd m-o-m to 1.75 mln bpd on force majeure events but also could potentially recover in November. Increased stability in Libya and a likely recovery in both Nigeria and Iraq could therefore drive total OPEC production higher m-o-m in November, pressuring prices. Over the shorter term, we think the October OPEC production figures will support prices after being reflected in the Bloomberg estimates today, and also in the monthly OPEC and IEA reports scheduled for release on November 13 and 14, respectively.
> API data sets the stage for bullish Wednesday. Post-settlement, Brent gained around $0.4/bbl after the API inventory data was released. US crude stocks fell 5.1 mln bbl to 456.8 mln bbl in the week to October 27 (close to the EIA's figure of 457 mln bpd for last week), versus the Bloomberg consensus forecast of a 1.3 mln bbl decline. The crude draw was largely driven by 0.4 mln bpd w-o-w drop in oil imports to 7 mln bpd. We do not expect the EIA data, scheduled for release at 17:30 Moscow time today, to show such a strong crude draw (it should come in close to the consensus); however, any surprise to the upside would be bring very strong support for prices today, as crude oil is the one remaining category in large surplus. The API data indicated strong draws in gasoline and distillate stocks (by 7.7 mln bbl and 3.1 mln bbl, respectively), both exceeding expectations. Although many expect a price correction on technical factors and profit taking, we think that front-month Brent will hold above the current elevated $61/bbl level today, supported by the weekly refined product stock draws.
> Strong Chinese demand supports gold ahead of Fed decision. Gold held at $1,275-1,278/oz range yesterday morning then started to slide in line with the yen (also considered to be a safe-haven asset), induced by a midday strengthening in Treasury yields. We think the selloff was triggered by comments from a US State Department official involved in US-North Korean talks, who said that "the preferred endpoint is not a war but some kind of diplomatic settlement." This in effect eroded the remaining $10/oz geopolitical uncertainty premium in the gold price, which eased to $1,268/oz early today, though it is now trading near $1,275/oz following a report by Chinese Central Television, citing the Chinese Gold Association, that gold consumption in China jumped 15% in 9m17. Today, the key event will be the Fed's rate decision at 21:00 Moscow time. The decision is a nonevent, with zero expectation of a change to the current 1.25% rate. However, the Fed is on track to raise rates three times in 2017, with a third hike almost fully priced for its December meeting. We also see no risk of a dovish Fed given strong 3Q annualized GDP growth of 3% Q-o-Q. Our FX analysts expect the accompanying statement to be neutral to slightly supportive for the dollar. We see gold likely retreating to $1,270/oz later today. President Trump is expected to nominate a new Fed chair tomorrow. Yellen's term ends in February.