Commodities. Oil and Gold Daily - November 2, 2017

> Oil prices retreat following EIA US inventory report. The front month Brent contract was hovering below $61.3/bbl early yesterday but strengthened to $61.6/bbl ahead of the EIA report. Upon the release, it started to slide and settled at $60.49/bbl, down $0.45/bbl on the day. We think the report was largely bullish, so we ascribe the retreat to closer to $60/bbl as largely the result of profit taking. As we mentioned yesterday, prices have been on a march higher recently, gaining $4.5/bbl over just six sessions, so a correction on technical factors and profit taking was almost inevitable. We still think the current equilibrium remains close to $58/bbl, so the difference represents a premium stemming from expectations of an extension to the OPEC+ production cut deal through 2018, in our view.
According to the EIA, US crude oil stocks fell another 2.4 mln bbl w-o-w to 454.9 mln bbl in the week to October 27, despite this being the season when oil inventories typically rise. The decrease was driven by a 0.5 mln bpd drop in imports to 7.57 mln bpd and a 0.2 mln bpd w-o-w surge in exports, which reached a new record high of 2.1 mln bpd, supported by the large WTI discount to Brent. Refining inputs also remained strong at 16 mln bpd, which is almost 0.5 mln bpd above the level seen at the same time last year and in 2015. Given this and the fact that refinery runs will soon start to pick up pace (returning from seasonal maintenance) and are likely to climb above 17 mln bpd in early December, further inventory draws are certainly in the cards this year. Current US commercial crude stocks are still a sizable 62 mln bbl above the five-year average. We expect this surplus to shrink to 42 mln bbl by year end, so more work will need to be done next year for the US market to fully rebalance.
Refined product data was also bullish, with gasoline stocks falling by a massive 4 mln bbl w-o-w, helped by maintenance at the Explorer pipeline. Distillate stocks eased just 0.3 mln bbl amid lower demand. Inventory drawdowns for both are questionable over the next few weeks, but given that both have already rebalanced (gasoline stocks are now in line with their five-year average and distillate stocks are hovering just below their five-year average), further potential stock gains would be unlikely to drive oil market sentiment lower. We do not see any risk events for the rest of the week and expect Brent to remain above $60/bbl.
> Strong Chinese demand supports gold prior to Fed decision. Gold gained $11/oz yesterday morning and almost broke above $1,281/oz following a report that Chinese gold consumption jumped 15% in 9m17. It then entered a sideways trading pattern in the $1,272-1,280/oz range. This morning, it is trading near $1,275/oz, with investors still digesting the results of yesterday's Fed meeting, but more importantly reports that Jerome Powell will become the new Fed chair in February. The Fed left rates and its statement unchanged, with a third hike in 2017 still planned for December. Later today, investors expect US President Trump to nominate Powell as the next Fed chair. Our FX analysts do not expect Fed policy to be altered and hence no shock for the markets. They think the announcement will drive the dollar lower, so gold could receive strong support later today. The opposite would happen should John Taylor, who is seen as a more hawkish candidate, be appointed, though this currently seems unlikely. In our view, the biggest risk event for gold today is the BoE meeting (15:00 Moscow time), where a rate hike is widely expected. Although this outcome is already partly priced in to UK government bonds, yields are likely to climb further if rates are indeed raised. This could cause outflows from gold as a non-yielding asset. We therefore anticipate further choppy trading, with gold retreating closer to $1,270/oz following the BoE announcement and then recovering to $1,275/oz later on Powell's nomination.