Oil and natural gas continue to see the highest inflows in the commodity complex as investors view current prices as increasingly attractive. WTI and Brent oil respectively fell a further 10.3% and 8.6% this week….
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ETF Securities Research
as both the IEA and OPEC cut demand forecasts for 2015 to the lowest level since 2002. However, underlying the cut to OPEC demand was an increase in non-OPEC oil supply, conceding some loss in market share. Many ETP investors believe that such low prices are unsustainable and this cut in demand forecasts is likely to be followed by a tightening in OPEC supply in 2015.
Long WTI ETPs see highest fortnightly inflows since 2012. Long WTI ETPs saw a further US$33.2mn of inflows last week on top of the US$45.7mn the week before. That contrasts the continued outflows from long Brent ETPs which saw a further US$0.5mn of outflows last week. WTI has fallen below US$60/bbl and Brent is trailing not far behind. At these prices, close to 20% of crude oil and condensates production from the United States are unprofitable according to the EIA. 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 economic growth in the US and China, combined with a reduction in oil supply, will eventually bring the oil market back to balance, with prices returning to trade around the US$90/bbl level towards the end of 2015. We believe the reduced demand forecasts from OPEC are a precursor to supply cuts.
ETFS Leveraged Natural Gas attracted a further US$10.7mn on top of the US$27.8mn the week before. With a larger-than-expected storage withdrawal confirmed on Wednesday, natural gas prices staged a small recovery mid-week, but closed down on the week as a whole. Despite the relatively warm US winter expected by NOAA, ETP investors believe that current prices remain very low for the peak heating season and given the unpredictability of weather, the risks remain to the upside for demand and price.
A 3.4% spike in silver prices prompted US$11.4mn of profit taking from ETFS Daily Leveraged Silver (LSIL). Marking the highest outflows from the leveraged silver product since 2011, investors took the opportunity to lock in profits before the year’s end. Over 50% of silver demand comes from industrial applications, with China and the US accounting for over 40% of global fabrication demand. Continued growth in these large economies in 2015 should see demand for silver increase, helping support prices.
ETFS Agriculture (AIGA) sees outflows on profit-taking. Despite the marginally bearish WASDE report out on Wednesday, wheat, corn and soy prices increased as rumours of Russian exports restrictions rattled the market. While not confirmed, prices were up strongly on Thursday only to ease on Friday as decent snow coverage in the US will help the 2015 wheat crop after a record 2014. ETP investors took profit to square their positions before the end of year.
Key events to watch this week. The Federal Open Market Committee’s last meeting for 2014 will be closely watched for cues on policy tightening to come in 2015. US CPI inflation data out on the same day as the central bank’s meeting, should attract attention as investors gauge the capacity for the Fed to maintain loose policy for longer. Gold prices are closely linked to the US interest rate path and indications of tighter policy could hurt precious metals. Consensus expectations are for HSBC’s Chinese PMIs to fall below the 50 mark, indicating a contraction in industrial activity from last month. Should they remain above 50, we could see renewed optimism in the Chinese growth outlook and their subsequent demand for commodities.