Commodities. Oil and Gold Daily - October 5, 2017

> Oil holding steady despite large crude draw in US. After retreating to a low of $55.5/bbl early yesterday, the front-month December Brent contract started to pare back losses following reassuring comments from Vladimir Putin at the Russian Energy Week forum. Putin noted that the OPEC+ production cut deal was beneficial for the global economy, and that a stable oil market was in everyone's interests, which was not surprising. However, he also said that an extension, if agreed upon, should be until at least the end of 2018, which is longer than had been assumed or proposed by any official. Brent breached $56/bbl on a couple of occasions before eventually settling at $55.8/bbl, down $0.2/bbl on the day.
Another key driver yesterday was the weekly US inventory update. The EIA reported that crude stocks fell around 6 mln bbl to 465 mln bbl last week, exceeding the Bloomberg median estimate of a 0.5 mln bbl decrease. The key takeaway from the data, in our view, is that a surge in oil exports (from a 0.85 mln bpd average in August to a record high of 2 mln bpd) came just in time to balance out the decrease in refining inputs (to 16 mln bpd, down 1.7 mln bpd from the pre-hurricane rate), which kept total crude demand close to the elevated 3Q17 levels. This suggests that if imports (especially from Saudi Arabia) remain near recent lows, further crude inventory draws in 4Q17 are likely, which is very bullish. For oil prices to rise further, we think the market needs to see capitulation in the US, the one major remaining oversupplied oil market. We were previously more skeptical as to whether a significant rebalancing would occur there in 4Q17.
It is, however, too early to assume that Brent will resume its ascent toward $60/bbl. We feel it is more likely to keep trading near $56/bbl, the fundamentally supported market equilibrium point. Our major concern is a seasonal ease in end-user demand that is already becoming apparent. US gasoline inventories expanded by 1.6 mln bbl last week, indicating that end-user demand cannot even keep up with the low post-hurricane production rates. In our view, this is what prevented Brent from settling above $56/bbl yesterday.
> Gold stable for third straight session. Yesterday gold managed to trade above the low end of the $1,270-1,275/oz range that it consolidated in at the start of the week. It even broke above this range midday to nearly reach $1,282/oz. This, however, was short-lived. Gold is back to a more familiar $1,275/oz today. Yesterday it was reported that the US ISM nonmanufacturing index surged to 59.8 in September, well above the expected 55.5 and the highest since August 2005. Markets took this as a sign that the US service sector was strong. As a result, the dollar rose, bringing gold down from its intraday highs to below $1,276/oz. Meanwhile, in remarks yesterday, Fed Chair Janet Yellen did not provide any insight on the state of the US economy or the chances of her remaining in her post. Investors will now look to US nonfarm payroll data on Friday, which should be weak due to the recent hurricanes. Our FX analysts see the euro coming under pressure today after the release of what should be dovish minutes to the ECB's September meeting at 14:30 Moscow time. In our view, the resulting rise in the dollar will pressure gold closer to $1,270/oz.