Oil remains in focus on falling US inventories

Commodity ETP Weekly Oil remains in focus on falling US inventories

Highlights

• Investors favour WTI over Brent as US inventories unexpectedly drop.
• Gold and silver ETPs suffer US$77mn of outflows on profit taking.
• Natural gas price correction drive inflows to natural gas ETPs to 34-mth highs as winter season approaches.
• Profit taking prompts 28-mth high outflows from wheat ETPs.
• ETFS Aluminium (ALUM) outflows hit 9-week high on price weakness.

Investors are becoming increasingly optimistic about oil outlook, with a fall in US stockpiles prompting the 10th consecutive weekly inflow into WTI ETPs. While prices are unlikely to recover sharply in the short-term unless output falls, the ongoing US economic recovery is likely to support demand for distillates.

Investors favour WTI over Brent as US inventories unexpectedly drop. While long Brent ETPs suffered US$82mn of outflows last week, long WTI crude ETPs recorded US$46mn of inflows. Both benchmarks’ prices dropped below US$70/bbl after OPEC’s decision not to cut production for the time being. While the IEA expects 82% of crude oil and condensates production from the United States is still profitable at a price of US$60/bbl or lower, if prices remain persistently low production will likely be reduced by higher cost producers. Although price weakness is likely to continue through the first half of 2015, continued growth from the US and China, combined with a reduction in oil supply, will eventually bring the oil market back to balance in our view with prices returning to trade around the US$90/bbl level.

Gold and silver ETPs suffer US$77mn of outflows on profit taking. Gold has risen almost 6% from the lows experienced after the Swiss gold referendum last week, while silver saw gains for over 15% from its nadir of US$14.08oz in 2014. We believe silver will continue to outperform gold in 2015, as the recovery in China and the US gains momentum, prompting a pick-up in industrial demand for silver.

Natural gas price correction drive inflows to natural gas ETPs to 34-mth highs as winter season approaches. Henry Hub natural gas prices fell by over 16% last week on mild weather, prompting US$30mn of inflows into long and leveraged natural gas ETPs. We expect prices to remain pressured in the short term by both weather forecasts of above average temperatures and abundant supply. However, the gathering momentum of the US economy and increased usage of natural gas in industry and electricity generation will create a supportive price environment in 2015.

Profit taking prompts 28-mth high outflows from wheat ETPs. The wheat price jumped 6.7% on unusually cold weather in the US in recent weeks, as frost might pose a threat to the newly seeded winter crop. Concerns over faltering Russian exports also contributed to buoy wheat prices last week. Russia announced it will consider introducing a floating tariff on grain exports to protect domestic supply should cold weather drastically reduce production. Outflows from long and leveraged wheat ETPs totalled US$20.3mn.

ETFS Aluminium (ALUM) outflows hit 9-week high on price weakness. Aluminium price hit a 5-year low last week, prompting US$52.8mn of outflows despite recent figures from the World Bureau of Metal Statistics showing a deficit in the global aluminium market in the first 9 months of the year. Overproduction in China is likely to continue to weigh on the aluminium price in the medium term. However, Norsk Hydro, one of aluminium’s biggest producers, expects prices to recover in 2015 on the back of tighter supply and strong demand from the automotive sector. At the same time, ETFS Copper (COPA) recorded the largest inflows since August, totalling US$13.4mn, on expected production cuts. Codelco, the world’s largest copper miner, recently announced it will cut production by 5% in 2015 in response to falling prices.

Key events to watch this week. This week will be dominated by China’s economic data, with aggregate financing, retail sales and industrial production all due to be released. China’s stock market surged last week as stimulus from the PBoC and the government is starting to produce its effects on the real economy.

Video Presentation

Simona Gambarini, Research Analyst at ETF Securities provides an analysis of last week’s performance, flow and trading activity in commodity exchange traded products and a look at the week ahead.

Important Information

This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority.