Commodities. Oil and Gold Daily - October 23, 2017

> Oil prices likely to face pressure as Baghdad substitutes shut production in Kirkuk. After sliding to an intraday low of $56.6/bbl early in the day on Friday, Brent for December delivery started to recover and eventually settled at $57.75/bbl, up $0.52/bbl on the day. By Friday, in response to the recent independence referendum held in Iraqi Kurdistan, Iraqi central government forces had taken control of much of the territory in and around the city of Kirkuk, including the key oil fields. Developments in Northern Iraq remain a focus for the oil market, since around 0.6 mln bpd of oil production is located near Kirkuk. Of that, 0.4 mln bpd is offline, as reflected in the volumes of oil being shipped via the 0.6 mln bpd Kirkuk-Ceyhan pipeline, which are reported to have decreased to around 0.2 mln bpd. The decrease coincided with the central government forces' taking control of almost 0.3 mln bpd of production previously run by the Kurds, which is a big blow to the regional government. In our view, Baghdad will now seek to renegotiate previous deals so that the revenue sharing is in its favor, which also suggests that it may take weeks for operations at the fields to return to normal. Late last week, the Iraqi Oil Ministry announced that it was substituting 0.2 mln bpd of the production lost from Kirkuk with volumes from the southern region of Basra that were capped to comply with the OPEC+ production cuts. Although Iraqi production was still around 0.2 mln bpd higher before the conflict, the quick pivot to increase the supply from the Basra region will pressure oil prices this week. We expect prices to continue following movements in contract differentials, which have seen the Brent December-January spread narrow from $0.4/bbl in the middle of last week to $0.15/bbl currently.
Today, the OPEC Board of Governors will begin a two-day informal meeting in Vienna. Comments on extending the deal are expected. The latest reports suggest that OPEC is now favoring a nine-month extension that would keep the cuts in place until end 2018 and that deeper cuts are not in the cards. The final reading on Chinese September trade data is due today; it is likely to be strong, with the preliminary estimate for oil imports surging to 9.03 mln bpd (the second highest figure on record). Both of these factors, in our view, could make any losses in prices early this week less pronounced.
> Gold continues to slide amid dollar strength. On Friday, gold lost around $10/oz and finished the day near $1,280/oz, driven lower by a rising dollar and Treasury yields. The dollar's strength, in turn, was fueled by the Republican-controlled Senate's passage of a 2018 budget blueprint, a sign of progress toward long-promised tax cuts. A weaker yen is also supporting the dollar this morning, after Japan's ruling Liberal Democratic Party won in Sunday's elections, which bodes well for easy monetary policy being kept in place. Over the next couple of days, we expect gold to retreat further, pressured by dollar gains on the back of euro weakness, the uncertainty surrounding the situation in Catalonia and the prospects of having the hawkish economist John Taylor named the next Fed chair. We expect gold to break below $1,270/oz later today.