Doha – Desert storm in a teacup Expectations at the Doha OPEC Summit were for a simple rubber stamping of the agreement to freeze OPEC production but this didn’t happen. The scaling up or Iran’s production is unlikely to have much impact on global supply in the short-term with global supply falling into deficit in Q3-Q4 2016.
The acrimony between Iran and Saudi was evident as Iran did not even attend the meeting. Iran has refused to freeze production and Russia has sympathised. Saudi has picked up market share lost by Iran when sanctions were imposed and Iran sees that it is only right that they have the opportunity to regain this share. We believe the Saudi Arabia has taken such a hard-line to protect its own interests, the current oil price is painful for them given that their fiscal costs of production are around $100/bbl, pushing their budget balance to -19% of GDP for 2016 according to the IMF.
Currently Iran has managed to scale-up production from 2.88mbpd in December 2015 to 3.29mbp in March (404k change), slightly below the consensus expectations of 500k. In the short-term we believe production in Iran is unlikely to move substantially higher as production is close to maximum potential with current infrastructure. A couple of projects assisted by China could push Iranian production up by 200kbpd in 2017.
The Saudi/Iran proxy war in Syria and Yemen isn’t helping stability within the region and there is a general skepticism amongst international banks and oil exploration and production companies over Iran’s nuclear deal. It is therefore likely that additional production infrastructure will not come online in the shorter term.
June 2nd is the next OPEC meeting but it’s unlikely a production freeze will be agreed at that point either. The oil price initially dived 7% reflecting a knee-jerk reaction by investors but has since settled at -2.5% at time of print. We expect little impact on market balances and we expect a global supply deficit by either Q3 or Q4 2016.
James Butterfill, Head of Research & Investment Strategy at ETF Securities
James Butterfill joined ETF Securities as Head of Research & Investment Strategy in 2015. James is responsible for leading the strategic direction of the global research team, ensuring that clients receive up-to-date, expert insight into global macroeconomic and asset class specific developments.
James has a wealth of experience in strategy, economics and asset allocation gained at HSBC and most recently in his role as Multi- Asset Fund Manager and Global Equity Strategist at Coutts. James holds a Bachelor of Engineering from the University of Exeter and an MSc in Geophysics from Keele University.
Can oil’s rebound be sustained without geopolitical risk?
Goldminers outperform as investors await US earnings.
USD pares losses ahead of jobs data.
Geopolitical risk has again hit the headlines, after Saudi Arabia launched air strikes on Yemen, prompting investors to seek defensive portfolio hedges. Oil and gold have staged solid rallies, while rising volatility has left investors concerned over the sustainability of equity market gains. Investors will have one eye on the US earnings reports scheduled to begin this week, with the USD strength potentially posing a threat to corporate bottom lines. The other will be monitoring global developments including whether or not Greece can submit an agreeable set of reforms for creditors, while balancing its own citizens’ expectations.
Commodities
Can oil’s rebound be sustained without geopolitical risk? The rebel fighting in Yemen that drove a Saudi Arabian led Coalition to launch military action boosted WTI crude prices over 10% last week to their highest level in three weeks. However, if the action is able to quell the violent rebel uprising, we expect some near-term weakness as the market refocuses on abundant supply. We expect a bottoming process has begun in oil and medium term strength is likely. Elsewhere in the commodity complex, rising geopolitical risk also boosted precious metals prices, with silver being the largest beneficiary of the flight to defensive assets by investors. The rising risk environment will add to the current low/negative rate environment in enhancing the appeal of precious metals. The release of the WASDE crop conditions report is a key highlight for the agricultural sector this week. The report will give insight into the planting intentions of US farmers for grain crops and the health of the winter wheat crop, allowing investors to gauge the supply side strength compared to the record 2014 crop.
Equities
Goldminers outperform as investors await US earnings. While most major equity indexes struggled to make headway against rising volatility on the back of geopolitical concerns, goldmining companies remain an investor favourite. The DAXGlobal Gold Miners index continued to stage a rally, in line the rally of gold and has risen by nearly 12% over the past three months. Meanwhile investors continue to push Chinese equity valuations higher, seemingly more comfortable with a stabilising growth outlook, despite a weakening in the manufacturing indicators last week. The MSCI China A Index ended the week up nearly 3% at an all-time high. The focus for investors this week will be the beginning of the corporate earnings season in the US. With equity valuations retreating from recent record highs, investors will be looking for evidence of a softening in results and the impact of the stronger USD. If these conditions are realised we could see a pullback in equity performance.
Currencies
USD pares losses ahead of jobs data. Fed chair Yellen’s speech last week highlighted the gradual nature of the tightening cycle when it begins later in 2015. Nonetheless, the USD has taken back some of its recent losses despite weaker data and investors are looking ahead to jobs numbers which have been the one area of strength for the US. Certainly inflation is non-existent, and has reached zero not just in the US, but also for the first time in the UK. While revised Q4 GDP is expected to moderate, European investors will be more interested in the Eurozone CPI and unemployment readings, which are likely to reveal that the ECB still has much to do to help boost inflationary pressures via strengthening demand.
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ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com
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Conflict in Yemen, Iranian nuclear talks and Greek debt negotiations will mean geopolitical risks are likely to dominate headlines and keep investor risk appetite subdued. As a result, asset price volatility will remain elevated, as illustrated last week by the impact of Saudi Arabia’s military actions, which sent the price of crude soaring. Towards the end of the week, investor attention will turn to US payroll data due, hoping to gain a better indication of the pace of interest rate hikes by the Federal Reserve.
Dovish outlook causes gold bears to trim exposure. Fed chair Yellen’s speech last week highlighted the gradual nature of the tightening cycle when it begins later in 2015. This has kept the US Dollar relatively subdued and precious metals prices supported as rate hike expectations continued to be pushed back – a process that began after the latest FOMC meeting. The gold price ended the week up 3.2% at US$1,199/oz, just below the important US$1,200/oz psychological level. The rally prompted US$109mn to exit ETFS Daily Short Gold (SBUL) as positive sentiment caused investors to reduce short gold exposure. Gold is likely to be supported by rising volatility in coming months, as investors dissect economic indicators to discern the start of the tightening cycle – currently expected at the September FOMC meeting.
Profit taking prompts ETFS Physical Silver (PHAG) outflows after 7.9% weekly rally. Silver followed gold higher last week as geopolitical concerns coupled with a relatively dovish tone from the US Federal Reserve about the pace and timing of rate hikes, boosted the demand for precious metals. Precious metals typically become an attractive alternative during periods of low interest rates and any perceived delays to rate normalisation in the US will act as a bullish factor for the complex. PHAG saw a net weekly redemption of US$7mn following the price rally, as investors locked in profits. This year silver has performed well rising 7.3% and has attracted of inflows US$70.7mn into ETPs providing long exposure.
Long WTI ETPs witness first weekly outflows in six months. US crude rallied 17% last week encouraging profit taking by investors with long exposure. The rally, initially instigated by Dollar depreciation. was assisted by Saudi led airstrikes launched in Yemen against the Houthi rebels, after the internationally recognised Yemeni president made pleas for assistance. Although Yemen produces relatively little oil, the bombings raised fears that the conflict would escalate between oil rich Saudi Arabia and Iran, which is believed to have provided arms, training and financial support to rebel forces. Long WTI ETPs, until now, had experienced the longest streak of net weekly inflows (25) since inception as investors positioned themselves for a recovery in oil prices. Last week, a total of US$50.1mn exited long oil ETPs, including US$26mn from ETFS Daily Leveraged WTI Crude Oil (LOIL), the largest net weekly outflow since 2011.
Key events to watch this week. Market focus will be on US payroll data due on Friday, as investors continue to try and preempt the pace of rate hikes in the US. Geopolitical risks will continue to remain in the fore as the deadline for an Iranian nuclear deal approaches and the impasse over a Greek debt deal lingers. Precious metals investors will be monitoring Eurozone CPI, which will likely reveal the ECB still has much to do to help boost inflationary pressures via strengthening demand.
Video Presentation
Joshpreet Tiwana, Research Analyst at ETF Securities provides an analysis of last week’s performance, flow and trading activity in commodity exchange traded products and a look at the week ahead.
For more information contact
ETF Securities Research team
ETF Securities (UK) Limited
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E info@etfsecurities.com
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