Commodity ETP Weekly: Investors position for widening of WTI-Brent Oil Spread


Commodity ETPs last week experienced the smallest outflows since the first week of June, as dovish comments by Fed Chairman Bernanke took upward pressure off bond yields and the US dollar. Also supportive of  sentiment towards commodities was higher than expected June loan data from China, helping  allay  fears of a full-blown liquidity crunch…..

    ETF Securities Research

    Today China reported that 2Q GDP growth was a healthy 7.5%, in line with consensus expectations and faster than some of the doomsayers were predicting. The combination of increasing confidence in continued highly accommodative monetary policy by the Fed, reduced upward pressure on the US dollar and reduced fears of a China hard landing is helping to extend the rally in cyclical assets and commodities. Bernanke’s semiannual testimony to the US Congress on Wednesday will likely be analysed in great detail by market participants,  as will any comments by Chinese officials on their growth targets.  While we believe that ultimately markets will recognise the Fed is serious about maintaining a highly accommodative policy and that China’s growth rate will hold above 7%, it is likely to continue to be a bumpy ride, with daily data releases and government comments continuing to drive market moves in the coming weeks.  

    Precious metals outflows abate. Outflows from precious metals slowed to lowest level since April and there were US$4.5mn positive net flows into the  precious metal  baskets last week. All precious metal prices rose,  as tapering fears lessened.  Investors sought to take profit in  platinum and palladium after prices rose 4.6% and 6.4% respectively, selling US$3.4mn of  ETFS Physical Palladium  (PHPD) and US$1.9mn of  ETFS Physical Platinum  (PHPT). Very little progress in wage negotiations in South Africa combined with looming energy security issues are likely to result in a supply deficit.

    Investors position themselves for widening of WTI-Brent spread. As the spread between WTI and Brent narrowed to the lowest level  in two years, investors appear to be betting on a reversal, favouring Brent over WTI. There were US$22.2mn inflows into  ETFS Brent  (OIL B) while US$7.8mn and US$11.5mn flowed out from  ETFS WTI Crude Oil  (CRUD) and  ETFS Daily Leveraged WTI Crude Oil  (LOIL)  respectively. Meanwhile flows into ETFS Daily Short WTI Crude Oil  (SOIL)  of US$6.2mn were the highest since February. Tightening gasoline stocks (which have been above their historic 5-year range since May), led to a 6.5% gain in gasoline prices last week  and spurred US$0.6mn into  ETFS Gasoline  (UGAS) and 0.5mn into ETFS Daily Leveraged Gasoline (LGAS).

    Tightening inventories saw inflows into aluminium and zinc while copper saw outflows.  Tightening  aluminium and  zinc  inventories  drove prices 1.3%  and 1.9%  respectively  higher and saw  US$5.4mn and US$5.3mn flow into  ETFS Physical Zinc  (PHZN)  and  ETFS Physical Aluminium (PHAL) respectively. Copper prices rose 0.5% last week as data showed that Chinese demand remained strong despite fears of economic deceleration. Investors  chose to redeem  US$11.4 from copper ETPs, locking in their gains before prices reacted to Chinese GDP data released this week.

    Investors take profit on corn before WASDE report. US$9.8mn flowed out of  ETFS Corn  (CORN) as investors locked in profits from the 6.7% weekly gain in prices before a bearish WASDE report sent prices lower on Friday. The WASDE report was mildly bullish on wheat based on increasing demand from China, which could engender investor interest in wheat ETPs this week.

    Key events to watch this week. Bernanke’s Congressional testimony on Wednesday will be watched very carefully this week.  US industrial production and housing market data  will also potentially drive markets. Inflation figures for the US, EC, UK and India will provide a guide for how much  room for expansionary policy remains. EU car sales after having fallen to a 20 year low could temper the gains in platinum if they fall further.


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