Commodities. Oil and Gold Daily - September 14, 2017

> Oil prices, despite a surge in oil stocks, rise on upbeat sentiment. After trading near $54.1/bbl early in the day yesterday, Brent for November delivery climbed about $0.5/bbl midday on the release of the IEA's monthly report and then about another $0.5/bbl after the EIA published its weekly estimate of US inventories. It eventually settled at $55.16/bbl, up $0.89/bbl on the day. A wave of upbeat sentiment triggered by the IEA report proved stronger than the rather noisy EIA inventory data, which was hard to interpret because of the disruptions caused by the two hurricanes.
We had underestimated the possible bullish takeaways from the IEA report. The agency raised its global demand estimate by 0.1 mln bpd to 1.6 mln bpd in 2017, allowing for the conclusion that OECD refined product stocks will fall to their five-year average by year end. Its latest survey of OECD commercial crude and product stocks showed that they had not risen in July, as they normally do, remaining unchanged m-o-m at 3.016 bln bbl (190 mln bbl above the five-year average). The report also showed that global crude supply had decreased in August on the back of less production by OPEC; indeed, less supply, combined with stronger demand, may drive potential declines in OECD refined product stocks. In our view, amid an increasing likelihood that the OPEC deal will be extended beyond 1Q18, the IEA's projections of stronger demand, especially in Europe and the US, in fact, may have a strong positive effect on sentiment that can support Brent at least above $52/bbl for weeks to come. The only factor that could undermine this is a surge in US crude inventories because of a slowed recovery of the US refining sector from Hurricane Harvey.
US crude inventories surged 5.9 mln bbl to 468.2 mln bbl in the week to September 8, according to the EIA report. The key takeaway from the data was that oil production has quickly recovered to pre-hurricane levels (rising 0.57 mln bpd to 9.35 mln bpd), while refining inputs continued to fall (falling 0.39 mln bpd to 14.07 mln bpd). Imports were down due to port disruptions, but are likely to recover soon. This, combined with the recovery in oil production, is likely to cause supply to outpace demand (refining consumption and exports) in the next few weeks. Demand will now be crucial to follow; if it fails to strengthen soon, the US will be set for a big surge in crude inventories in late September, which we see as the most likely scenario.
> Gold prices pressured by risk-on sentiment and inflation data. Gold prices slid by about $10/oz midday yesterday to within a $1,320-1,325/oz range, as US Treasury yields and the dollar firmed on signs of growing inflation, which theoretically increases the probability of a rate hike. The US PPI for final demand reading for August showed a gain of 0.2% m-o-m (after a 0.1% decrease in July), which marks a 2.4% y-o-y gain (after a 1.9% y-o-y gain in July). These increases were mainly driven by the hurricane-related surge in gasoline prices and thus are not likely to compel the Fed to hike rates this year. Today, investors are awaiting the CPI data due from the US at 15:30 Moscow time. The core reading is likely to remain at 1.7%, supporting the dollar and strengthening the chance of a rate hike by year end. If there is a rate hike, gold would likely once again be driven lower by the subsequent gain in Treasury yields and the dollar.