Commodities. Oil and Gold Daily - November 17, 2017

> Oil retreats; investors digest al-Falih's comments; US rig count eyed. The front-month Brent contract peaked early yesterday at $62.14/bbl and started to slide, with an unsuccessful attempt to recover later in the day. However, it managed to hold on above $61/bbl and settled at $61.36/bbl, $0.51/bbl below the previous settlement. Prices were on the defensive for most of the day as Wednesday's EIA data indicated an increasing likelihood of inventory builds and once again highlighted relentless growth in US oil production, with both factors fueling mildly bearish sentiment (for more details see yesterday's Oil and Gold Daily). Today, we expect prices to remain under pressure as investors are puzzled over the likely outcome to the upcoming OPEC meeting in light of comments by the Saudi Energy minister yesterday. Later on, investors will await the Baker Hughes oil rig count data at 21:00 Moscow time. The decline in the rig count that started in August was interrupted last Friday, when the company reported a nine rig increase over the week, which weighed on prices at the time. We think a further increase in the rig count is likely today. The latest EIA drilling productivity report indicated that US tight oil production will continue to expand in December. Given this, we expect Brent to dip below $61/bbl later today.
At the UN climate conference yesterday, Saudi Energy Minister Khalid al-Falih provided food for thought to investors with regard to the outcome of the upcoming OPEC meeting on November 30. He appeared to suggest that an extension to the OPEC+ deal all the way through to end 2018 is not in the cards, in line with our expectations. This is an outcome that many have priced in this month, thereby exposing Brent to a correction below $60/bbl should this extension not be agreed upon. Yesterday, al-Falih made it clear on a couple of occasions that OPEC does not want to shock the market with a supply shortage and subsequent spike in prices. We think exteding through 2018 would do just that in 2H18 given OPEC's recent demand growth projection, which is expected to be as strong as this year, when the global surplus has been significantly eroded. Most importantly, this would mean OPEC loses control for a long period. Al-Falih's comment that "an extension of some sort" is likely at the meeting also implies that the cartel could opt to extend the deal in stages (if at all necessary), an outcome that would give oil bears the upper hand for some time, in our view.
> Gold inches higher on quiet day of trading. Gold traded in the $1,275-1,280/oz range yesterday, with all key variables with which gold has a strong correlation also trading sideways in a tight range. Developments in the overhaul of the US tax code remain in the spotlight and one of the main drivers behind the dollar. Overnight, the House of Representatives passed legislation cutting the corporation tax rate, which is a positive development for reformers and the dollar. However, we do not expect the dollar to draw strong support, as the next hurdle is the Senate and will be difficult to overcome. Our FX team thinks that passage through the Senate by year end would be an achievement and represents the main upside risk for the dollar into year end and thus downside risk for gold. Today is quiet data-wise (the main event comes in Europe, where ECB President Draghi gives a speech at 11:30), with no strong price drivers expected to materialize. Gold has gained some uncertainty premium and support from a weaker DXY, as the investigation into Donald Trump's alleged collusion with Russia in last year's presidential election has once again reared its head. We think gold will hold on to this morning's advance above $1,280/oz and end the week close to this level.