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Analys

Oil and gold remain top trades as bargain hunting drives flows

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Research by ETF Securities

ETF SecuritiesGold and oil ETPs both respectively saw their 9th consecutive week of inflows. The price of gold and oil has fallen in recent weeks, in part reflecting a reduction in the geopolitical premium following a ceasefire agreed by Ukraine and Russia. Bargain hunting investors have chosen to increase their holdings of oil with its price looking particularly attractive, with both Brent and WTI oil benchmarks trading below US$100/bbl. We believe OPEC is likely to cut production if demand for oil continues to remain weak, which will in turn help support prices. Despite weakness in gold prices, investors have generally maintained holdings over the past few months. Daily flow data however indicates that some investors are losing patience with gold in recent days and its weak price could test the endurance of some investors if the relatively stable geopolitical situation lasts.

ETF commodity flowsBargain hunting drove US$7.4mn into long oil ETPs, marking the longest stretch of weekly inflows since 2012. Although bets weren’t completely one-sided, with US$2.7mn of inflows into short oil ETPs, many investors are doubtful that the current weakness in oil price can persist. Weak global demand for oil products this summer, combined with the limited impact of geopolitical risks on OPEC and Russian oil supply sent both Brent and WTI prices to multi-month lows. With production reaching multi-decade highs, US oil inventories had remained above its 5-year range until very recently and stockpiles at Cushing have been slowly rebuilding. While Chinese oil imports and the US summer driving season have not been as supportive of oil demand as expected, the US Energy Information Agency (EIA) is forecasting a supply deficit for the second half of 2014 and OPEC is anticipating a pick-up in global oil demand during the remaining months of 2014. Should that pick-up in demand not materialise, we believe that OPEC will cut production from its current target of 30mb/d.

Long wheat ETPs saw their 17th consecutive week of inflows as investors mounted bets on a less bearish USDA report. After months of successive production and stock upgrades, some investors thought that last Thursday’s World Agricultural Demand and Supply Estimate report would show some stabilisation. It turns out that they were disappointed. The price of wheat fell 4.2% last week alone and is now trading at the lowest level since 2010. With wheat priced for perfect growing conditions, any small hiccup in weather in major producing countries or an escalation in trade restrictions could drive a price rally. More bargain hunting is likely with prices at multi-year low levels.

Concern over China and supply prompted another week of outflows in industrial metal ETPs, marking the largest cumulative four week outflow since May 2013. Last week, US$9.1mn was redeemed from ETFS Industrial Metals (AIGI) basket and most long industrial metal ETPs saw outflows. Long copper ETPs in particular saw US$18.6mn of outflows. Industrial metal prices declined as jitters over the health of Chinese demand troubled investors and the probability of the Philippines following Indonesia’s lead in banning ore exports has lessened. By the end of the week, however, China reported strong credit growth for the past month, which should go a long way to ease concerns about its ability to drive demand for commodity-intensive house building and infrastructure construction.

Key events to watch this week. The Federal Reserve’s FOMC meeting will be the focus of market attention. The US central bank is expected to continue to taper its bond-buying programme at the current rate, which will only leave another meeting (after this week’s) before it announces a stop to more purchases. After a disappointing US payrolls report, the market will watch out for any changes in forward guidance that could signal rate changes slower than current market expectations.

Analys

Crude oil comment: A price rise driven by fundamentals

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SEB - analysbrev på råvaror

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.

Ole R. Hvalbye, Analyst Commodities, SEB
Ole R. Hvalbye, Analyst Commodities, SEB

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.

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Analys

OPEC+ holds back on December increase while US produces more

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SEB - analysbrev på råvaror

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.

Bjarne Schieldrop, Chief analyst commodities, SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

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 crude oil production reached a new all-time high in August
Source: Graph by SEB, data by US EIA

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. 

US shale oil production grew at a marginal
Source: SEB calculations and graph. Data by US EIA.
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Analys

Brent rises on prospect of Middle East flare-up

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SEB - analysbrev på råvaror

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.

Ole R. Hvalbye, Analyst Commodities, SEB
Ole R. Hvalbye, Analyst Commodities, SEB

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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