OPEC resisted calls to cut production last week, disappointing investors who had positioned for a tightening of oil supply. Brent oil fell more than 8% in response. OPEC countries, which produce approx. 40% of global oil…
ETF Securities Research
output, refrained cutting because non-members like Russia and Mexico made it clear that they will not reciprocate and hence OPEC countries will simply lose market share. Last week’s inaction increases the need for a large cut at the June 2015 OPEC meeting. Although the Swiss population rejected the proposal for their central bank to hold 20% of its assets in gold, support for metal will likely come from India. In a surprise move, the Indian government loosened the restrictions on gold imports, which will likely increase physical gold demand as local premiums fall.
Oil ETPs inflows surged in anticipation of production cuts. Last week we saw US$12.4mn and US$13.3mn of flows into long Brent and long WTI oil ETPs respectively.
Flows into Brent were the highest since August while flows into WTI were the highest in four weeks. Although OPEC resisted calls to cut production last week, we believe the cartel will eventually have to reduce supply to help stabilise global oil prices. The cartel jointly produces approximately 40% of global oil output. While the US is gaining an increasing share of global output (by displacing oil imports through its own production) and Russia remains a formidable player, we believe it is too early to write off OPEC as an irrelevant cartel when it comes to setting global prices. We believe that last week’s inaction increases the need for a large cut at the June 2015 OPEC meeting. Many OPEC countries need oil prices above US$100/bbl to balance government budgets. While these countries can run budget deficits, the appetite to do so will wear thin as the cost of financing starts to increase.
We believe that OPEC countries will reunite to work in their common interest instead of engaging in a price war. Indeed the price of oil right now is too low for many of the shale and tight oil operations in the US to remain profitable and will curtail the rapid expansion of US oil production until prices stabilise at a higher level. We believe some investors will view today’s oil price as an attractive entry point in anticipation of tightening supplies in 2015 and will accumulate long positions in oil ETPs. Other investors may pare their holdings in response to yesterday’s inaction if they have a shorter investment horizon.
Investors favour palladium over platinum. Palladium ETPs received US$33.6mn of inflows last week, marking a 3-week high, while platinum ETPs saw outflows of US$10.4mn, marking a nine-week low. Both demand and supply drivers support palladium over platinum. Brisker car sales growth in the US and China compared to Europe supports more greater palladium use over platinum. Palladium supply is also more constrained, given historic reliance on Russian State stockpile sales, which we believe have dwindled close to zero. ETFS Nickel (NICK) sees highest inflows since May on supply concerns. US$14.9mn flowed into NICK last week. Some investors fear that the Philippines could follow Indonesia’s lead in banning raw ore exports. China had become highly reliant on the Philippines for high grade laterites imports for its nickel-pig-iron (NPI) production. If the Philippines also ban exports of the ore, Chinese production of NPI could suffer and raise demand for closely related nickel in 2015.
Key events to watch this week. Next week will be dominated by central bank decisions with the Bank of Canada, Bank of England and European Central Bank having their
respective policy meetings. While no changes in policy setting are expected, guidance for the future will be closely watched. We will finish the week with US non-farm payrolls. Any strong growth in jobs could be construed as a cue for the Federal Reserve of the US to raise interest rates in H1 2015, which would be gold price negative.