Commodities. Oil and Gold Daily - October 16, 2017

> Oil prices surge amid Iranian, Iraqi supply uncertainty. After gaining $1.1/bbl by midday on Friday to hit an intraday high of $57.56/bbl, the front-month December Brent contract started to slide and eventually settled at $57.17/bbl, up $0.92/bbl for the day. This morning prices have surged once again, with front-month Brent trading around $57.85/bbl. The latest gains are being driven by the increasing likelihood of supply disruptions in Iraq and Iran, which are OPEC's second and third highest producing countries. On Friday, US President Donald Trump not only refused to certify Iran's compliance with the nuclear deal - which should have been a formality given that international inspectors say that it is complying - but also announced that he would scrap the deal if Congress fails to pass legislations that would impose the condition of blocking Iran's nuclear program forever. This has elevated the possibility of Iranian oil exports being once again capped (as a result of which over 2014-15 Iranian production was only 2.8 mln bpd, or 1 mln bpd below the current level).
In our view, the key difference this time is that the US does not have international support. French President Emmanuel Macron, for example, told Trump on Sunday "not to tear up" the Iranian deal, meaning that a 1 mln bpd loss is not a foregone conclusion. However, a loss of, say, around 0.3 mln bpd is realistic, although it might take months before Congress amends the deal or Trump delivers on his promise to rescind it. Thus, we can expect oil prices to shift lower once the story starts to fall out of the headlines in the next couple of weeks. For now, it is a bigger concern for the physical market. Asian buyers may need to find other sources of supply, as for them it is a matter of domestic energy security. It is an especially sensitive issue given that on Friday it was unveiled that Chinese imports in September had surged to 9.03 mln bpd (the second highest figure on record). This drove oil prices up early on Friday. Given that a number of new refineries are getting ready to come on line, imports are set to rise even higher in December. Uncertainty in the Middle East is also coming from the fact that Iraqi government forces have taken control of vast areas of Kirkuk, including the key oilfields. This makes it less probable that Turkey will block the major 0.6 mln bpd Kirkuk-Ceyhan pipeline, in our view, although supply disruptions are likely due to the escalation of a conflict within Iraq itself. We see uncertainty about supply from the Middle East supporting Brent trading at around $58/bbl this week.
> Gold gains on low US CPI print. Gold surged above $1,300/oz on Friday after the US CPI printed at 0.5% m-o-m in September (below the consensus of 0.6%), which put the y-o-y gauge at 2.2% (below the 2.3% consensus). Core inflation held at 1.7% y-o-y (missing the consensus of 1.8%). The next Fed meeting concludes on November 1. The recently weaker than expected inflation data could provide grounds for US policymakers to turn less hawkish, which would pressure the dollar and support gold prices. The low September CPI reading has not significantly reduced the probability of a December rate hike, which has edged down from 80% to 77% judging by interest rate futures. Yesterday, Janet Yellen continued to call for further rate hikes, downplaying the subdued inflation readings and concentrating on the strength of the labor market. This morning, gold is trading around $1,305/oz. Investors will pay close attention to Catalan President Carles Puigdemont's statement today on whether the region has declared independence from Spain. We believe a further weakening of the euro could be in the cards and see gold as well supported above $1,305/oz due to global uncertainty, including over a brewing conflict in Iraq, as well as the Austrian elections, which demonstrated a turn toward the right.