Commodity ETP Weekly: WTI ETPs See Inflows as Discount to Brent Hits Eight Month High

Last week commodity performance was mixed, with energy posting some strong gains and most industrial metals remaining under pressure…..

ETF Securities Research

Last week commodity performance was mixed, with energy posting some strong gains and most industrial metals remaining under pressure. The Henry Hub natural gas price was the biggest gainer, rising 5.2% on the back of colder weather in parts of the US. Meanwhile the WTI oil price dropped even as the Brent price rose as investors focused on continued increases in US oil inventories. We believe the WTI oil price sell-off is overdone given the strength of the US economic recovery and expect the gap with Brent to narrow in the coming weeks.
The gold price was supported by a weaker US dollar, while supply deficits in palladium helped drive its price higher ahead of US car sales data out this week. With better-than-expected Chinese manufacturing PMI data setting the tone for a busy data week, cyclical commodities are likely to remain in focus.
Investors position for a rise in the WTI oil price as its discount to Brent rises to the highest level since March 2013. There were US$9.1mn of inflows into long WTI oil ETPs, the most since April 2013, while Brent oil ETPs saw US$2.3mn of outflows. The front month WTI futures price fell by 3.3% last week as investors continue to focus on growing US oil inventories. With the US in strong recovery mode, China oil demand expected to remain strong and refiner demand expected to continue to increase as we move into the winter months, we expect US oil inventory increases to moderate and help support the WTI oil price, now trading near the bottom of its one year trading range.
Long palladium ETPs see US$9mn of inflows on stronger macro outlook. With the auto markets in China and the US faring better than those of Europe, gasoline autocatalysts which use more palladium than diesel autocatalysts are likely to see better sales. At the same time, supply remains tight for both metals. Last week Northam Platinum of South Africa announced that it will have to cut jobs after a strike crippled production. As more miners cut back on unprofitable production, the supply deficit is likely to widen. Johnson Matthey expects the deficit in palladium and palladium to reach 605koz and 740koz respectively this year.
Investors turn bearish on copper. There were US$17.2mn outflows from ETFS Copper (COPA) and US$4.9mn inflows into ETFS Daily Short Copper (SCOP) last week, amounting to US$22.1mn of bearish trades on copper. That virtually mirrors the US$21.8mn bullish trades on copper the previous week. Investors appear to be especially sensitive to signs of slowing demand or rising supplies, explaining the swiftness in changing positions. Falling US durable goods orders explain the latest dent to sentiment. We believe fears of an over-supply of copper are overdone and expect a higher price in 2014.
Leveraged Natural Gas (LNGA) sees $10mn of outflows as natural gas price surges. The natural gas front month futures price rallied 5.2% last week as a cold winter in parts of the US increased demand. It appears short term investors decided to take profits on the gains, selling $10mn of their leveraged natural gas positions. We expect further price gains as we move into a colder than usual US winter.
Gold ETPs continue to see outflows despite prices stabilising.
There were US$48mn of outflows from long gold ETPs last week despite the gold price increase as investors continue to focus on possible reductions in US quantitative easing policies early next year.
Key events to watch this week. ECB and BoE policy meetings with be watched closely for cues on future rate decisions. There will be a raft of manufacturing PMIs/ISMs, most notably from the US and EU, in addition to the strong China numbers that came out today. US non-farm payrolls out at the end of week will garner a particularly high level of attention given that it is the last major data release of the year.




Although gold often gains during extreme events, the start of the first US Federal shutdown in seventeen years last week failed to lift the gold price. Investors appear to be looking through the storm and are focused on assets that will either benefit from the continuation of the global growth recovery or are generally uncorrelated with debt risk.  Cotton and sugar gained 2.3% and 1.8% last week, bouncing from lows hit in September, but without strong news driving the trend. Platinum and palladium fell 3.6% and 2.5% respectively. That comes despite a 17% rise in Japanese auto sales (to a 14-month high) and a 12.1% rise in UK car sales (to a five-year high). US car sales also remained brisk, despite the timing of Labor Day distorting the monthly statistics. Autocatalyts are the primary source of demand for the platinum group metals (PGMs). The strike that started two weeks ago was still on-going last week at Amplats, constraining the supply of PGMs.

    MA Weekly 07.10.13 1


US equities remain under pressure as the negotiations over raising the US debt ceiling continue. The S&P 500 fell for the second consecutive week as Republicans and Democrats continued to fight over the budget and debt ceiling. European equities have also been sensitive to the political turmoil in the US. The Euro Stoxx 50® Investable Volatility Index, which provides exposure to the forward implied volatility of the Euro Stoxx 50® Index, surged 5% last week, followed by the FTSE® MIB Super Short Strategy Index and the ShortDAX® x2 Index, up 3.5% and 1.4% respectively. Global equities are likely to remain volatile and under pressure as we get closer to the estimated 17 October hard deadline for lifting the debt ceilding.

MA Weekly 07.10.13 2


Safe haven currencies benefit as US fiscal negotiations drag on. The Japanese Yen (JPY) was the best performing G10 currency last week as investors sold risky assets and paid back JPY loans on growing concern about the lack of progress on US fiscal and debt negotiations.  For similar reasons the Swiss Franc (CHF) and even the Euro (EUR) also rallied against the US dollar last week. The British Pound (GBP) held up, continuing the trend of the past three months. However, towards the end of the week the currency showed some weakness, indicating the rally may be peaking. In our view, the GBP is one of the more overvalued G10 currencies and – despite recent rhetoric – has one of the more dovish central banks. We therefore believe the currency is particularly vulnerable to a sharp drop once growth data stop surprising to the upside.

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