Commodities. Oil and Gold Daily - November 7, 2017

> Oil prices surge amid rising Saudi-related tensions. After trading near $62.5/bbl yesterday, front month Brent began to surge and came very close to breaking above $64.5/bbl later in the day. It eventually settled at $60.62/bbl, $2.2/bbl above the previous settlement price. The bullish run since late October was triggered by Saudi crown prince Mohammed bin Salman's stated support for an OPEC+ cut deal extension and continues to be driven by developments (internal and external) surrounding Saudi Arabia. Internally, numerous Saudi princes and officials were arrested over the weekend and charged with corruption, which has effectively strengthened and concentrated power around the crown prince, making the OPEC+ cut deal extension even more likely in investors' minds given his support for the deal. Externally, Saudi-Iranian tension escalated to new highs at the weekend, when a missile launched from Yemen was intercepted over Riyadh. Saudi Arabia blamed Iran, which is supporting the Houthi movement in Yemen, accusing it of an "act of war." The US has also blamed Iran for the missile launch, though Tehran has denied the accusations. However, the market has taken the latest developments as a step closer to direct military conflict, and any such threat in the Middle East usually pushes oil prices higher.
We do not expect the rising Saudi-Iranian tensions to result in a fallout at the upcoming OPEC meeting. No key OPEC member has ever left the group, even when Iran and Iraq have stood against Saudi Arabia on issues, most notably during the Iraqi invasion of Kuwait in 1990. The recent Qatari conflict has also not undermined the cartel's workings. Given the scale of the latest oil price surge, we think profit taking is in the cards this week and could materialize straight after the EIA inventory release on Wednesday. Before that, investors will eye the EIA's short-term energy report (containing updated global supply and demand forecasts), which we expect to be neutral. We think the EIA is likely to revise its US production growth forecast higher given the current elevated oil price environment, though a downward revision to the OECD's oil inventory as well as upgraded oil price forecasts will surely balance out the negatives. Given the above, we expect Brent to stabilize within the $63-64/bbl range.
> Gold benefiting from geopolitical tensions and weaker DXY. Gold mirrored the move in oil yesterday, trading at around $1,270/oz before surging and almost breaking above $1,283/oz later in the day. The move also coincided with a weakening in DXY and Treasury yields. This morning, gold has eased to around $1,280/oz as both DXY and Treasury yields have started to pare back losses. Rising tension and the likelihood of a direct military conflict between Saudi Arabia and Iran have boosted gold, while a dip in Treasury yields on the decreasing likelihood of the US Republican tax cut plan being passed with a subsequent fall in DXY have provided further support. Today, investors will focus on ECB President Draghi, who is set to speak at 12:00 Moscow time, while Fed Chair Yellen might provide comments late in the day at 22:00. Our FX analysts expect the dollar to strengthen today, which should drive gold lower, supported by profit taking. US President Trump is visiting South Korea today and we expect him to comment loudly on the confrontation and the likelihood of military conflict with North Korea, limiting the drop in gold prices. We expect gold to consolidate around $1,275/oz later today.