ETP Weekly: A four-year high in oil ETP inflows

Continued oil price declines drove further rounds of bargain hunting last week, with WTI and Brent oil ETPs seeing their highest weekly inflows since 2011. WTI fell to US$48/bbl and Brent came within a whisker of US$50/bbl, putting their price at more than 5-year lows. We believe that oil prices at these levels are unsustainable…..

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ETF Securities Research

Although OPEC resisted calls to cut production in November, highlighting the need for oil prices to find a new equilibrium, we believe the cartel will eventually have to reduce supply to help stabilise global oil prices. The cartel jointly produces approximately 40% of global oil output. Saudi Arabia, the largest producer in the cartel, raised its sale price of Arab Light grade oil in Asia for February last week, implicitly acknowledging that the price-war has gone too far. Demand for cyclical commodities, including oil, could rise this year as economic growth continues to improve. US non-farm payrolls released on Friday displayed an upside surprise once again, provding a boon to cyclicals.

Weekly oil ETP inflows highest in four years. Long Brent oil ETPs received US$76.9mn of inflows last week, the highest since March 2011, while Long WTI oil ETPs gained US$81.6mn of inflows, the highest since June 2011. Bargain hunting is clearly continuing to drive the flows in a week where Brent fell 11.1% and WTI dropped 8.4%. WTI investors in particular do not appear to be deterred by the falling prices with 15 continuous weeks of inflows having been recorded (during which time WTI has fallen a cumulative 45%). Brent oil ETPs have seen four consecutive weeks of inflows, also indicating that many investors think that global oil prices are nearing a bottom. US oil rigs have already started to decline and are 10% below September level. Historically, oil rigs have taken about 16 weeks to adjust to lower oil prices. During periods of strong declines in WTI crude price, like during the 2008 crisis, oil rigs have halved in the following four months and we expect a similar pattern to occur in 2015. Tightening of oil supply in the US and other oil producing countries could be a precursor to the OPEC cartel cutting supply come its June 2015 meeting.

Natural gas ETPs saw US$7.5mn of inflows last week, marking the seventh consecutive week of inflows. A cold snap drove the price of natural gas 1.3% higher last week. Gas storage inventories also fell more than expected, supporting prices. Most of the flows came into ETFS Leveraged Natural Gas (US$5.1mn), indicating a short-term tactical play on the weather issues that are driving the price.

ETFS Physical Silver (PHAG) received highest inflows in nine weeks. Flows into PHAG amounted to US$17.3mn. Silver prices rebounded 2.5% last week to the highest level since mid-December 2014 as geopolitical risks once again drove the price of the defensive precious metals like gold and silver. With terrorist attacks in France and questions surrounding the future of Greece in the euro area, geopolitical concerns have once again come to the fore. The positive employment numbers from the US released on Friday failed to cap the gains in both gold and silver last week.

ETFS Aluminium (ALUM) sees outflows of US$41.3mn, the most in five weeks. After a 12% rally between October and November 2014, aluminium prices have been falling. Excess production capacity, especially in China continues to weigh on aluminium prices. While we believe that capacity will be eventually be cut, the process will take some time.

Key events to watch this week. Chinese lending and exports data will be closely watched as investors assess the strength of demand from the world’s largest consumer of commodities. US inflation data could give an indication of the urgency or lack thereof for interest rate hikes. Consensus expectations of a fall in headline inflation are likely to keep calls for quicker rate rises at bay.


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