Analys
Commodities continue to attract investor attention
Commodity ETPs saw their largest inflows in six weeks, with bargain-hunters attracted by depressed valuations. Several commodities including Brent, platinum, palladium and most industrial metals rose last week rebounding on the back of the better investor sentiment toward commodities. With many commodities trading so close to their marginal cost of production, we believe that prices cannot fall much lower without triggering a supply response. Better-than-expected GDP and industrial production data from China, the world’s largest consumer of commodities, also helped boost cyclical commodity prices.
Inflows into physical gold reach six week highs. There was US$22.6mn of inflows into physical gold last week as the price of the metal fell a further 0.4%. With gold trading just above our estimated marginal cost of production (US$1,100/lb), a natural floor to the metal appears to have been reached.
Bargain hunting drives US$12.3mn into long crude oil ETPs, a seven week high. After reaching a 5-year low the previous week, Brent oil, recovered 2.8% last week. WTI on the other hand continued to slip 0.7%. At bargain prices, ETP investors bought into crude, with US$5.1mn flowing into long Brent ETPs and US$7.2mn into long WTI ETPs. According to media reports (although not confirmed officially), Saudi Arabia cut supplies by 328,000 barrels a day in September to 9.36 million barrels a day. Ample supply has been weighing on prices and if confirmed, Saudi’s moves could help prices recover further.
ETFS Daily Leveraged Natural (LNGA) attracts US$9.mn as Henry Hub prices slide 4.6%. Natural gas prices fell as working gas in storage rose 94Bcf last week. Storage values however remain 9.0% below year-ago levels and 9.1% below the 5-year historical average. Natural gas is a commodity that is highly sensitive to changes in weather that experience sharp supply drawdowns and investors are betting on a price rebound ahead of winter peak demand.
ETFS Platinum Trust (PPLT) sees largest outflow since March on profit-taking. Platinum rose 1.5% last week driving a US$6.1mn redemption from PPLT. Anglo American Platinum (Amplats) disclosed that the five-month strike earlier this year had cost the company 424,000 ounces in lost production and it lost a further 108,000 ounces in the subsequent ramp-up. However, it also confirmed it has resumed production a month ahead of schedule, which could cap gains in the near-term.
An 11% decline in coffee prices led to profit-taking for ETFS Daily Short Coffee (SCFE). US$2.2mn was redeemed from SCFE, marking the highest outflow from the short coffee ETP since May. The violent price moves have polarised investors with US$1.6mn flowing into ETFS Daily Leveraged Coffee (LCFE) last week – the highest in six weeks. Drought and irregular rain in Brazil, the world’s top producer has hurt the prospect for the 2015 crop. However, with rains resuming, the flowering process has started for the 2015 crop, but analysts are divided in their opinion as to the extent the earlier disruptions will damage the crop.
Key events to watch this week. All eyes will be on the Federal Reserve’s policy meeting in which the central bank is expected to announce the end of its asset buying programme. Any extension of its programme could trigger a rally in gold prices as currency debasement fears linger for longer. Weighing on investors’ minds is the prospect of rate rises, which we expect to occur in H1 2015. Investors will listen for cues from the Fed on this front.
Analys
Crude oil comment: A price rise driven by fundamentals
Brent crude prices have maintained their upward momentum, rebounding from last week’s low of USD 70.7 per barrel, spurred by relief over limited Israeli retaliation toward Iran, which left energy infrastructure (both oil and nuclear) undamaged. Since that point, as projected, prices have risen by USD 4.6 per barrel in just seven days.
This momentum has been further fueled in the last two days by changes in market fundamentals. Reports confirming OPEC+ plans to delay its previously scheduled oil production increase, originally set for December, have contributed to the continued rise, pushing prices up to the current level of USD 75.2 per barrel.
Late last week, Brent prices were also influenced by Iranian rhetoric, with Iran pledging further retaliation. The latest WSJ report suggests that Iran may be planning a ”strong and complex” response against Israel, likely after the US election. The report also notes that Israel’s October 26 strike inflicted significant damage on Iran’s air defenses, heightening tensions. While the timing of any Iranian response remains speculative, further hostilities between Iran and Israel appear very predictable.
Despite looming geopolitical uncertainty and the potential for a heightened risk premium, the impact of current market fundamentals remains significant. To our surprise, OPEC+ has confirmed it will postpone its planned December production increase of 180,000 barrels per day.
However, this deferral doesn’t remove the target of adding a cumulative 2.2 million barrels by December 2025. OPEC+ will continue to monitor the market, increasing supply as soon as conditions favor it, which will likely keep substantial oil price gains in check over the coming year.
Analys
OPEC+ holds back on December increase while US produces more
OPEC+ will not to lift production by 180 kb/d in December as planned. Of course an effort to prevent the oil price from sliding lower. US crude oil production is at the same time ticking up by 38 kb/d/month in September and the growth pace looks like it is ticking higher by the month as new US shale oil production is growing faster than losses in existing production. US crude oil reached a new, all-time high of 13.4 mb/d in August. The US is not making it easy for OPEC+. The group is trying to tell the US: ”Slow your growth, because we need to produce more!”. To no wain it looks. Iranian sabre-rattling helps to lift Brent this morning.
Brent crude fell 3.9% last week in a sense of eased Iranian-Israeli tensions. Brent crude traded in a range of USD 70.72 – 76.05/b last week and closed down 3.9% week on week on Friday at USD 73.1/b. The low point last week was driven by relief that the Israeli retaliation towards Iran looked fairly limited with no damage to either oil infrastructure or nuclear installations. Muted rhetoric from Iran Iran to start with also helped to drive the price to its low point last week. Iranian rhetoric with promises of re-retaliation increased through the week and the oil price rose along with that towards the end of the week. What is for sure is that there will be more rocket exchanges between Iran and Israel to come. That barrier is totally broken.
But tensions are rising again as Iranian re-retaliation is in the planning. News this morning (Wall Street Journal) is that Iran is planning a ’Strong and complex’ re-retaliation attack on Israel at some point after the US election. The article also states that the Israeli attack on Iran on 26 October severely damaged parts of Iran’s air defenses. This isn’t over.
OPEC+ holds back planned increase in December to avoid price declines. Brent rises 2% to USD 74.5/b this morning as OPEC+ decides to delay its planned increase of 180 kb/d in December. The planned increase of a total of 2.2 mb/d over a 12 month period has however not been called off. That still hangs over the market as a dark cloud. It tells the market that there is limited upside in the oil price in the year to come. Global demand acceleration in 2025 – OPEC+ will take that. Disruptions in supply in 2025 – OPEC+ will step in and take that. It is only a massive loss of supply involving the Strait of Hormuz which would be out of the hands of OPEC+ to cover.
US crude oil production at new all-time high in August of 13.4 mb/d. Not making it easy for OPEC+. US production reaches new all-time high in August at 13.4 mb/d. Monthly controlled data released in late October showed that US crude oil production increased by 195 kb/d to 13.4 mb/d and a new all-time high in August. US NGLs increase by 135 kb/d to 7.03 mb/d as well. If we add together US crude, NGLs, bio, refinery gains and adjustments, then total US liquids probably came in at 23.13 mb/d in August. With US liquids demand at 20.4 mb/d it leads to a net US liquids export of 2.7 mb/d
US shale oil production growth pace is ticking higher. US shale oil production grew at a marginal, annualized pace of 451 kb/d/month in September. The annualized growth pace was 401 kb/d in August. The pace is picking up. US shale oil producers are not making it easy for OPEC+.
US crude oil production reached a new all-time high in August at 13.4 mb/d. Production of NGLs also increased. US crude + NGLs + bio + refinery gains + adjustments puts US total liquids production at more than 23.1 mb/d in August.
US shale oil production grew at a marginal, annualized pace of 451 kb/d in. The growth pace is picking up as new production grows faster than legacy losses.
Analys
Brent rises on prospect of Middle East flare-up
Brent crude prices have extended their recent rally, reaching USD 74.3 per barrel this morning, marking a gain of USD 1.25 per barrel since last evening.
Earlier in the week, signals pointed towards a potential de-escalation in Middle East tensions, with Israel reportedly considering a US-led initiative to address the conflict in Lebanon. However, as noted in yesterday’s crude oil comment, Israel’s military chief issued a strong warning, vowing a significant response should Iran attempt further aggression.
Fueling the recent surge in oil prices are reports from Axios (an American news outlet) suggesting that Iran is preparing to launch a retaliatory strike on Israel from Iraqi territory in the coming days. This heightens the likelihood of additional hostilities potentially erupting before the US election on November 5th.
According to the source, the anticipated attack would likely involve drones and ballistic missiles, with Iran potentially relying on allied militias in Iraq to carry it out. This approach may be a strategic effort by Tehran to avert a direct potential Israeli re-re-retaliation on Iranian soil.
While the situation in the Middle East could escalate sooner than expected, both Israel and Iran seem reluctant to ignite a full-scale regional war. Thus, any additional responses from Iran might remain restrained, similar to Israel’s limited strike last weekend, hence primarily intended as a demonstration of strength rather than an invitation to open warfare.
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