ETP Weekly: Commodities back in favour as recent correction deemed excessive

While most commodity prices continued to lose ground last week, investors started to realise that prices cannot fall much further, prompting inflows into precious metals, WTI crude and agriculture. With most…

ETF Securities Research

commodities trading at or below their marginal cost of production, we expect the recent downward correction in commodity prices to be short-lived and believe commodities are attractively valued at current levels. 

Precious metals back in favour with US$13mn of inflows.  With the exception of palladium, all precious metals received inflows last week  reversing the negative trend seen over the past few weeks. With platinum trading 10% below its marginal cost of production and gold and silver  fast approaching their breakeven  levels, we believe  those commodities are  attractively valued.  Increasing uncertainty in currency and equity markets should be beneficial to gold, while the recent pick-up in auto sales will continue to provide support to Platinum Group Metals (PGMs). While silver stocks remain elevated, we expect industrial demand to rise and buttress price action over the next few months as the recovery in the US and China gains momentum. 

Long WTI crude oil ETPs record largest inflows since April 2014 as price drops below $80 for the first time since June 2012.  Inflows totalled over US$20mn last week. While sentiment in the crude oil markets is negative at the moment, the US Energy Information Agency forecasts a production deficit for the remainder of 2014, which we believe is not factored in the price. We believe that if demand remains this weak OPEC will eventually cut production, helping to stabilise prices.

Profit taking drives US$11mn of outflows from long coffee ETPs.  Arabica coffee has been the best performing  commodity  this year, with a 96% gain over the period. A weak harvest in Central America has recently exacerbated supply concerns. The International Coffee Organisation envisages only a slight recovery in the 2014/2015 season as a devastating leaf rust disease is likely to prompt switches to other crops, in turn reducing production.  At the same time, agricultural basket ETPs recorded another week of strong inflows as investors deem the recent downward correction excessive. With the entire grains sector trading below total cost of production, a rebound is overdue.

Negative sentiment towards copper remains despite expected deficit in 2014.  ETFS Daily Short Copper (SCOP) saw US$2.5m of inflows last week as  the price dropped 2.6%. However, we believe the current price weakness will be short-lived as investors return to focus on  fundamentals. The copper market will likely be in a deficit for the 5th  consecutive year in 2014, according to the most recent estimates released by the  International Copper Study Group. According to the revised figures, this year will see a supply deficit to the tune of 307,000 tons vs a previously expected supply surplus of 405,000 tons, on lower production and stronger demand.  
Key events to watch this week. A number of Chinese economic statistics are coming out this week and will help investors gauge the strength of the economy as the PBOC introduces more stimulus. China’s Q3 GDP data will be watched closely for any sign of slowdown beyond target. Bank of England minutes will also be looked at closely as last month two policymakers voted for a rate hike, with seven voting for the status quo. A less hawkish Board meeting will likely see the downtrend for Sterling remain in place.


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