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….
The outlook for cyclical commodities has improved after China’s central bank cut interest rates for the third time in six months in order to stem the slowdown in economic activity. However, risk appetite could be limited, with sharp moves in both directions for benchmark equities keeping investors on edge. As a result, gold appears to have come back into favour as a defensive hedge against declining sentiment. Gold appears set to benefit again this week, with Greek debt negotiations likely to prevent any significant upswing in investor risk appetite.
Gold leads precious metal inflows to 11 week highs of US$49m. Investors looked to physical gold exposures last week to offset the rough patch experienced by global equity markets as rising volatility saw most global benchmarks post sharp declines. ETFS physical gold ETPs received the largest inflows in 12 weeks, totaling over US$38mn. Alongside gold inflows, silver received the largest inflows in four weeks, totaling over US$4mn, despite a moderation in prices.
ETFS Coffee (COFF) had its second highest weekly flow since inception in 2008. The Colombian Coffee Growers Federation reported that the country’s coffee production for April grew 11.06% year-on-year, prompting a price decline last week, but investors saw this as a better entry point to establish long positions. However, Colombia only produces 11% of global Arabica output. Brazil who produces 45% of global output, has had significant drought damage to its coffee bushes in 2014 threatening the yield in 2015. Added to that, a firmer Brazilian Real removes a catalyst for stock-offloading by Brazilian farmers. We believe that coffee prices could benefit from a tightening in supply from Brazil. Elsewhere in the agricultural sector, long wheat ETPs have seen the fifth consecutive week of inflows, totaling nearly US$27mn. Lower crop planting intentions by US farmers this season compared to last have given investors greater optimism of a run down in elevated inventory levels.
ETFS Aluminium (ALUM) receives highest inflows in six months. ALUM received US$72mn of inflows last week, as confidence regarding the outlook for Chinese growth gains momentum. Aluminium prices have been in decline as the market has been abundantly supplied. However, Chinese imports increased by over 30% in April from a year earlier. Meanwhile, the solid gains in recent weeks experienced by copper price has seen investors book profits, with withdrawals from ETFS Copper (COPA) at the highest levels in seven months, totaling US$40mn.
Profit-taking in oil ETPs for the seventh consecutive week. Oil prices posted declines last week, despite US stockpiles dropping for the first time in x months. After rising on expectations of prices declined as the EIA revealed a drop in inventory levels.
Certainly recent rally appears stretched given the fundamentals, as supply remains abundant, and not just in the US. OPEC continues to produce more oil despite budgetary problems, but if prices remain at current levels, excess US production is not expected to be under any pressure.
Key events to watch this week. Eurozone Q1 GDP will be the key event this week in order to determine whether the ECB’s stimulus is having an impact on the real economy, and whether investors are justified increasing gold holdings. Greek debt negotiations will also have a near term impact on investor sentiment.