Commodities. Oil and Gold Daily - October 30, 2017

> Oil continues to rise as investors keep pricing in OPEC+ deal extension. On Friday, Brent for December delivery started out trading close to $59.40/bbl but retreated to an intraday low of around $58.90/bbl at midday. It began marching toward the $60/bbl mark on the New York open and eventually settled at $60.44/bbl, up $1.14/bbl on the day. The gains were driven by investors' pricing in expectations that the OPEC+ deal will be extended at the OPEC meeting that ends November 30. This is similar to the tide that lifted Brent above $59/bbl on Thursday, with more and more investors assuming an extension. Following his interview last week (which we discussed on Friday), Saudi Crown Prince Mohammed bin Salman said on Saturday, "the Kingdom affirms its readiness to extend the production cut agreement," giving oil bulls more reason for optimism.
In our view, the latest price movements suggest that the market is nearly taking as a given that the deal will be extended all the way thorough 2018. It may be getting ahead of itself, which is, of course, where the danger lies. Take the latest comments of Russian Energy Minister Alexander Novak for example. He said that an extension needed to be agreed in winter, when demand for oil usually falls, effectively attempting to put the decision off until updated balance data for the winter comes out. The major unknowns going into the OPEC meeting are how strongly US shale production will respond to Brent at $60/bbl+ on a permanent basis and by how much the global surplus will shrink by end 1Q18, when the deal expires. In our view, OPEC will take into account oil prices and the latest estimates of the global supply-demand balance at the time of the meeting. If, for instance, Brent continues to hold at $60/bbl and previously reported 1H17 global stock builds are revised downward, it is very likely that the deal will be extended for a shorter time than until end 2018 or that the decision will be deferred to late 1Q18. If either of these scenarios plays out, a sharp retreat in Brent will be in the cards. We think that Brent will stay above $60/bbl for most of this week, supported by expected upbeat comments by Saudi Energy Minister Khalid al-Falih midweek (at conferences in Melbourne and Bangkok) and preliminary estimates of OPEC October production by Reuters and Bloomberg, which are expected to show a m-o-m decrease on disruptions in Iraq.
> Decline in Treasury yields supports gold; central bank meetings eyed. After hovering above $1,265/oz during the first half of the day on Friday, gold surged above $1,270/oz later in the day, coming up just short of $1,275/oz. Support was largely drawn from a decline in US Treasury yields, even as the DXY index remained steady at around 95. UST yields had initially risen on the back of stronger than expected US 3Q GDP data, which showed 3% Q-o-Q annualized growth - above the consensus of 2.6% - despite the negative impact of hurricanes Irma and Harvey. This should help the Fed hike rates once more this year and three times next year, as currently planned. However, the rise in yields proved short-lived, as Bloomberg reported shortly thereafter that Donald Trump was leaning toward appointing Jerome Powell to be the next Fed chair (Powell is seen as more dovish than the other leading candidate, John Taylor). This morning, gold is trading around $1,270/oz ahead of this week's Fed, BoJ and BoE meetings. In our view, the biggest risk event for gold is Thursday's Bank of England meeting, where a rate hike is widely expected. Though this outcome is already partly priced into British government bonds, yields are likely to advance further if rates are indeed raised. This could cause outflows from gold, a non-yielding asset. Today, however, market players will be focused on a batch of US consumer spending data due at 15:30 Moscow time, which will include the September PCE deflator reading. The PCE price index, the Fed's favorite inflation gauge, is expected to remain at a low 1.3% y-o-y. Our FX analysts do not expect any significant moves from the dollar. Accordingly, we expect gold to remain near $1,270/oz today.