Nitesh Shah (pictured), director of research at WisdomTree Europe’s ETF Securities, writes that last week saw oil prices rally close to 6 per cent intraday on Friday after OPEC’s lack of transparency sent markets wondering about what levels of production increases will they will see this year from the group.
Investors redeemed on USD9.6 million long oil ETPs and redeemed USD5.7 million short oil ETPs last week to minimise their potential loses.
“Although the communication is obscure, we believe that OPEC has given the green light to those members who can increase production to go ahead and do so. Removing individual country quotas mean that each individual nation is free to pump out what they wish – they are not violating a quota – only the group will be. The group could easily swing from over-compliance to under-compliance. Individual quotas had the benefit of transparency. A group-wide quota suffers from the classic problem game theorists call the “prisoners dilemma” where betrayal is the equilibrium solution despite cooperation leading to everyone in the group being better off. Prior to 2014, when the OPEC only had a group-wide quota, compliance was poor. We expect oil production to rise, most likely removing Friday’s price gains. OPEC’s lack of transparency is likely to introduce a lot of volatility into oil prices.”
Last week, silver witnessed outflows of USD107 million, the largest since September 2017. Last week’s outflows from silver reversed the prior month’s USD95 million of inflows. Speculative positioning in the futures market has been recovering lately, after having fallen to an all-time low.
Shah writes that silver had started to catch up with gold, with the gold to silver ratio falling to 76 on June 14th, the lowest it has been since November 2017. But when gold prices tumbled on June 15th, silver’s correlation with the yellow metal resumed and silver prices declined 5.7 per cent last week. With silver falling harder than gold, outflows have resumed.
Dollar appreciation trims gold demand. The US Dollar basket rose to an 11-month high last week and gold fell 1.3 per cent as a result. Gold ETPs saw the second consecutive week of outflows, amounting to USD32.7 million last week. Investors redeemed on USD5.4 million Long USD-Short EUR ETPs and bought USD7.1 million Long EUR-Short USD EPTs last week.
Trade war jitters sent industrial metal ETP demand lower, last week. Shah writes: “Last week there were USD36 million of outflows from industrial metal basket ETPs, the highest since February 2018. That doesn’t quite reverse the prior week’s USD53 million of inflows or the USD39 million of inflows the week before that, but exposes possible cracks in investor sentiment. Industrial metal prices fell 2.5 per cent last week as investors appeared to fear a burgeoning trade war would hurt demand for metals.
“We believe that the trade frictions does more to damage supply chains than it does to dent global growth and hence it is should be seen as price positive rather than a price negative event for industrial metals. We are likely seeing a repeat of the knee-jerk reaction that metals experienced when the first round of tariffs on China were announced by the US in March. Metal prices rose substantially in April after the initial knee-jerk reaction.”