Investors buy into oil before price rise

A hawkish post-meeting statement from the Federal Open Market Committee drove the US dollar (DXY) temporarily higher, suppressing gains in many commodities. However, subdued PCE deflators and muted increases in wages took the edge off upward US dollar pressure by the end of the week and barring any surprises, commodities should be able to trade on their own fundamentals

WTI oil ETP inflows surged to a seven-month high. WTI oil bounced 6.3% on Wednesday following a lower-than-expected inventory build last week. In the run-up to the announcement, investors piled into long WTI oil ETPs (totalling more than US$86.2mn, between Friday and Wednesday), before taking profit on the news, leaving net inflows for the week at US$66.4mn, the highest since March 2015. Many investors correctly believed that the prior week’s excessively high inventory build would not be repeated. Indeed rig counts in the US have been declining for 9 consecutive weeks and are currently 63% below the levels last year. More than US$200bn of CAPEX cuts have been announced across the industry and the effect of the stalled projects will soon bite into global oil supply and moderate the glut. Meanwhile with the Organization of the Petroleum Exporting Countries operating at close to capacity, the traditional role of the cartel – to increase production in times of outages elsewhere – will be compromised, increasing the risk of price shocks in the oil market.

Investors buy gold on dips. The Federal Reserve’s hawkish post-meeting statement send gold 2.6% lower on Thursday, driving US$15.8mn into long gold ETPs on the day. For the week as a whole, we saw more than $31.5mn of inflows into long gold productsas investors position for a potential bounce back. With the Fed downplaying globalrisks and conditioning their next rate move on the domestic market, many see the nexttwo labour market reports as a pivotal guide to the timing of first rate hike in nine years. However, sophisticated investors realise that the payroll numbers in the labour market report are not only volatile, but subject to frequent and significant revisions. Gold’s decline this week could once again turn out to be premature.

Inflows into US natural gas ETPs hit a 4-month high. Natural gas prices surged 11% on Thursday after the release of storage data, which showed inventory building below expectations. Investors bought US$7.2mn of long natural gas ETPs during the week. We are likely to see some profit-taking from this, as inventories still lie more than 1 standard deviation above their five-year average, and prospects for a warmer winter with El Niño affecting US weather could see some of the recent injections being underutilised.

Key events to watch this week. Markets will be focused on the non-farm payrolls numbers out at the end of this week. A disappointing September reading and large downward revisions to July and August estimates has set the tone for a sub-200k consensus expectation for October. However, for many FOMC Governors, including NY Fed’s Dudley, a figure of 120k-150k is enough to ‘push the unemployment rate lower’ and could pull the trigger to vote for a rate hike. Should this month’s reading disappoint, we could see gold rally as rate hike expectations get pushed further out.

Nitesh Shah – Research Analyst – ETF Securities