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Profit-taking drives USD58.1 million out of long oil ETPs

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With Brent and WTI oil prices bouncing a further 1.4 per cent and 1.8 per cent respectively last week, more investors took profit on their positions, according to ETF Serucrites latest Commodity ETP Weekly report.

Last week was the third consecutive week of outflows as the price of Brent and WTI have gained 16 per cent and 22 per cent respectively over that period. Recent gains however appear excessive given the fundamentals. The positive reaction to a slower inventory build in the US two weeks ago was somewhat premature, given that last week inventories grew at a quicker pace than expected. All indications point to OPEC continuing to produce more oil, with March output from the cartel surging 810,000 barrels per day. 

Geopolitical risk has added a premium to the oil price, with Saudi Arabia’s attacks on Yemen, threatening to destabilise the Bab el-Mandeb Strait, a narrow chokepoint between the Horn of Africa and the Middle East. The strait is a transit point for 3.8 million barrels per day of oil, or 4 per cent of global oil supply. Any easing of the instability in Yemen could see the premium dissipate relatively quickly. Moreover, Saudi Arabia could continue to increase the amount of oil it produces, which would pull down prices. In March it increased oil production by 660,000 barrels per day. A short-term correction in oil prices could once again open up an opportunity to go long oil for many investors ahead of the next OPEC meeting in June, where we expect talk of modest cuts to production to help prices increase once again. 

“With oil prices staging a premature recovery, many investors are taking profit,” says Nitesh Shah (pictured), associate director – research at ETF Securities. “Global oil supply has not yet tightened, pointing to a geopolitical premium on oil prices accounting for the recent price gains. We believe there could be a correction in the short-term, but prices will continue to rise once supply starts to tighten. Tightening supply has also driven tin prices higher and we expect a similar trend across most industrial metals this year. Falling energy prices has not reduced production costs for metals sufficiently to restore profitability and supply cuts are the likely course for most metals.”

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