Commodities. Oil and Gold Daily - October 17, 2017

> Oil steady at current elevated levels amid uncertainty in Iraq. After skyrocketing by almost $0.65/bbl to $57.85/bbl early yesterday the front-month December Brent contract has stabilized and started to drift up slowly. Later in the day, it fell just short of breaking above $58.5/bbl before sliding to eventually settle at $57.82/bbl, closing $0.65/bbl above the previous settlement. Yesterday, investors were watching developments in Northern Iraq, where Iraqi government forces have taken control of vast areas in and around the city of Kirkuk, including the key oil fields, in response to the recent Kurdish independence referendum. Around 0.6 mln bpd of oil production is situated around Kirkuk. Up to 0.35 mln bpd of production was temporarily shut when Iraqi government forces advanced into the region yesterday. Although operations were quickly brought back online, the threat of Kurdish-managed fields being taken over remains. It is still uncertain if government forces are even seeking to do this, though. Given the latest developments, the risk of new supply disruption is certainly very high and both sides have the ability to interfere with each other's supplies. However, by the same token, because of the complexity and interwoven nature of the oil industry in the region, neither side can deliver a blow to the other without standing to suffer economically itself. It remains to be seen whether either side would be willing to disrupt supplies at its own expense. Also, if Turkey goes ahead and blockades the major 0.6 mln bpd Kirkuk-Ceyhan pipeline, as is widely feared, Turkish business interests in Kurdish territories would likely be affected - a fact that may serve as a deterrent to such a blockade. In short, this interdependence may lend a certain amount of stability to what is otherwise a tenuous situation. We think that the uncertainty from both this conflict and potential US sanctions on Iran have generated a $1/bbl uncertainty premium. For today, we expect front-month Brent to keep trading around the $58/bbl with the Iraqi conflict remaining in the spotlight.
> Gold slides on profit taking, driven by stronger US dollar, higher Treasury yields. Gold prices were steady during most of the day yesterday, trading within the $1,300-1,305/oz range before sliding by almost $13/oz in the evening to an intraday low of $1,291/oz. This decrease came amid simultaneous gains in both US dollar and Treasury yields, which triggered profit taking. The drop in gold came on the heels of rumors that Donald Trump is likely to opt for the hawkish John Taylor as the next Fed chair. Trump is also rumored to be meeting with current chair Janet Yellen this Thursday, with some clarity expected then. Whether the US will remain strong this week will depend largely on the euro. Spanish PM Mariano Rajoy extended a deadline to Thursday morning for the president of Catalonia to back down from claiming independence for the region. Market players will eye September Eurozone CPI data today (12:00 Moscow time), which is largely expected to be underwhelming. The dollar index is expected to only inch slightly higher. Our FX analysts see resistance at 93.8, with gold expected to ease within a range of $1,285-1,290/oz today on the current profit-taking momentum. With the DXY at 93.8, we see the equilibrium price for gold at $1,275/oz, although the turmoil in the Middle East has so far been generating an up to $10/oz uncertainty premium.