ETF Securities – Oil Continues to Rally

With oil prices staging a premature recovery, many investors are taking profit. Global oil supply has not yet tightened, pointing to a geopolitical premium on oil prices accounting for the recent price gains….

We believe there could be a correction in the short-term, but prices will continue to rise once supply starts to tighten.
Tightening supply has also driven tin prices higher and we expect a similar trend across most industrial metals this year. Falling energy prices has not reduced production costs for metals sufficiently to restore profitability and supply cuts are the likely course for most metals.

Profit-taking drives US$58.1mn out of long oil ETPs. With Brent and WTI oil  prices bouncing a further 1.4% and 1.8% respectively last week, more investors took  profit on their positions. Last week was the third consecutive week of outflows as the  price of Brent and WTI have gained 16% and 22% respectively over that period. Recent  gains however appear excessive given the fundamentals. The positive reaction to a  slower inventory build in the US two weeks ago was somewhat premature, given that  last week inventories grew at a quicker pace than expected. All indications point to  OPEC continuing to produce more oil, with March output from the cartel surging 810,000 barrels per day. Geopolitical risk has added a premium to the oil price, with  Saudi Arabia’s attacks on Yemen, threatening to destabilize the Bab el-Mandeb Strait, a  narrow chokepoint between the Horn of Africa and the Middle East. The strait is a  transit point for 3.8 million barrels per day of oil, or 4% of global oil supply. Any easing  of the instability in Yemen could see the premium dissipate relatively quickly.

Moreover, Saudi Arabia could continue to increase the amount of oil it produces, which would pull down prices. In March it increased oil production by 660,000 barrels per  day. A short-term correction in oil prices could once again open up an opportunity to go long oil for many investors ahead of the next OPEC meeting in June, where we expect talk of modest cuts to production to help prices increase once again.

ETFS Daily Leveraged Nickel (LNIK) sees its highest weekly inflows since inception in 2008. LNIK received US$2.2mn of inflows last week, following the International Nickel Study Group’s April meeting in Lisbon where it predicted that nickel usage will increase to 1.94Mt in 2015 from 1.87Mt in 2014. At the same time it forecasts production will decrease to 1.96Mt in 2015 from 1.99Mt in 2014, helping to tighten the supply surplus this year.

ETFS Daily Leveraged Tin (LTIM) had its second highest weekly flow since inception in 2008. Sharp price gains attracted US$1.6mn of inflows into LTIM. With Indonesia’s largest tin producer cutting output by as much as 50%, tin prices accelerated last week, gaining 3.4%. Tin prices had slumped by more 35% in the past year, increasing the urgency to cut back on production by the largest producing country.

Key events to watch this week. The Federal Open Market Committee will meet this week to decide on interest rates. This will be last meeting before June and will not be accompanied by a press conference. The market will therefore remain very attentive to FOMC member speeches and public engagements to glean any information about the possible path of rate increases this year.


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