Commodities. Oil and Gold Daily - October 31, 2017

> Oil prices hold steady despite Baghdad replacing lost production in Kirkuk. Brent for December delivery was trading around the $60.5/bbl mark for most of yesterday and settled $0.46/bbl higher at $60.9/bbl. The January contract will become the new front-month gauge tomorrow and is trading $0.3-0.35/bbl below the December contract as the Brent futures curve is backwardated and closed yesterday at $60.59/bbl, down $0.46/bbl on the day. Developments in Iraq remain the focus for the market, where as much as 0.4 mln bpd of production (out of a total of 0.6 mln bpd) is offline due to the Iraqi government's military offensive in and around the city of Kirkuk, including key oil fields. The reduced production swiftly brought volumes shipped via the 0.6 mln bpd Kirkuk-Ceyhan pipeline (the sole northern export artery) to just 0.2 mln bpd, but they have subsequently recovered to 0.29 mln bpd.
In mid-October, the Iraqi Oil Ministry announced that it would replace 0.2 mln bpd of the lost production from Kirkuk with volumes from the southern region of Basra, which have been capped to comply with the OPEC+ deal. This week it became known that exports from southern Iraq (the main export route), which had eased by 0.11 mln bpd m-o-m in October to 3.13 mln bpd on adverse weather delaying waterborne shipments, have now surged to 3.45 mln bpd, or around 0.2 mln bpd above the YTD average. Iraqi exports are therefore still 0.1 mln bpd below the levels seen before the conflict broke out, which explains why there has been a muted price reaction to the latest news that Baghdad has started to replace shut production in Kirkuk. We think Brent will remain above $60/bbl for most of this week, supported by preliminary estimates for October OPEC production by Reuters (likely released today) and Bloomberg (tomorrow), which we expect to indicate a m-o-m decrease given the disruption in Iraq. However, we expect Kirkuk production to recover in November as workers are reported to be returning so operations should be able to resume. That could prove to be bearish over the medium term, as it is still unclear if Iraqi government would reduce the southern exports accordingly.
> Dip in DXY supports gold prior to Fed meeting. Gold traded around the $1,272/oz mark yesterday morning then surged to almost $1,279/oz, mirroring a drop in the US dollar index, which retreated to 94.5 from the 95 mark last seen in mid-July. This morning, gold is still hovering above $1,275/oz, drawing support from the weak dollar, as the US government is again under pressure: the official investigation into President Trump's alleged collusion with Russia during last year's election campaign brought its first charges yesterday. Trump's former campaign manager was charged with money laundering, while a former advisor pleaded guilty to lying to the FBI. Treasury yields also remain under pressure over the increasing likelihood that Jerome Powell, the more dovish candidate, will be the next Fed chair, providing further support for gold. This week, the two-day Fed meeting, which starts today, will be one of the most important events for gold. The tone of the post-meeting statement on the future of interest rates will be important, but the decision over the next Fed chair remains the most crucial factor in play. Today, investors await 3Q Eurozone GDP, October CPI (13:00 Moscow time) and US consumer confidence at 17:00. We think gold will remain elevated throughout the day, as it is likely to be supported by the uncertainties mentioned above and EUR/USD is likely to trade flat.