Commodities. Oil and Gold Daily - October 27, 2017

> Oil prices surge as investors price in OPEC+ deal extension through end 2018. Brent for December delivery was trading close to $58.40/bbl early in the day yesterday. In the evening, it began marching toward the $59.00/bbl mark and then surpassed that, driven by comments of Saudi Arabian crown prince Mohammed bin Salman. The front-month contract eventually settled at $59.30/bbl, up $0.86/bbl on the day. Post-settlement, it rose to as high as $59.5/bbl. In an interview with Reuters largely about the planned IPO of Saudi Aramco, bin Salman said the company was on track to go public in late 2018; however, oil market participants focused on his upbeat answer to a question about extending the OPEC+ deal. He said that Saudi Arabia was committed to working with all producers to extend the deal all the way through 2018 and that it "will support anything to stabilize the oil demand and supply." Another focus for participants was his remark that "the oil market swallowed the shale oil supply," which we take to mean that the deal has brought growing global demand level with supply.
Earlier in the week, Brent broke above the $58/bbl mark during a speech by Saudi Energy Minister Khalid al-Falih. He was keen to emphasize that the countries party to the deal would do "whatever it takes" to bring the global oil and refined products surplus down to normal levels, which is defined by the industry as the five-year average global inventory level. Note that at the Russian Energy Week forum earlier this month, Russian President Vladimir Putin said that any extension should last until at least end 2018, a longer period than had been assumed or proposed by any other official, Russian or OPEC. The Kremlin later clarified that Putin's remark was not an official proposal but was rather aimed at highlighting the possibility of such an extension.
Given the strength of the recent messages coming from top officials in Russia and Saudi Arabia, the two countries that effectively are in control of the deal, the market has taken them at face value, more actively pricing in an extension. We think that the announcement of anything less than an extension through end 2018 at the next OPEC meeting, due on November 30, will be viewed as bearish. We believe that, from a fundamental perspective, the equilibrium price is around $57/bbl and that another $2/bbl is currently priced in in anticipation of an extension of the deal through end 2018 at the November meeting. Today, Brent will likely retreat from the $59.50/bbl peak and consolidate in a range of $58.50-59.00/bbl on profit taking.
> Weaker euro drives DXY higher, forcing gold to retreat. Gold, having avoided a move below support of $1,270/oz on three occasions since August, finally broke below that level yesterday and is trading around $1,265/oz this morning. This was driven by a spike in the DXY Index that pushed it above long-standing resistance of 94 to around the 95 mark. The reason for the spike was a weakening of the euro, brought on by the ECB's decision to extend, but ease the pace of, bond purchases. The QE program was extended by nine months through September 2018, with the possibility left open of further buying after September. The likelihood of a rate hike in 2018 was reduced, and it is now more likely to happen in mid-2019. Our FX analysts also note that the euro fell sharply despite the decision's being broadly expected. Today, investors will be focused on US 3Q GDP data (15:30 Moscow time). Given the strong durable goods orders reported earlier this week, it is likely to surprise on the upside (consensus: 2.6% Q-o-Q annualized growth). The dollar is thus likely to make further gains. We expect gold to retreat to closer to $1,260/oz today.