Investors taking advantage of recent oil price weakness

Oil ETP inflows of US$73mn last week represented the 5th consecutive week of inflows which total US$140mn, representing 9% of assets under management

Oil ETP inflows of US$73mn last week represented the 5th consecutive week of inflows which total US$140mn, representing 9% of assets under management. Investors have seen the recent oil price weakness (-8.6% ytd), as a consequence of poor discipline to the agreed OPEC production freezes and record exports of oil from the US, as an opportunity to buy on weakness. Inflows over the longer term have not recovered to the stellar levels seen in 2015, we believe this reflects investor’s concerns over technological improvements in the tight oil market in the US, where marginal costs of production have fallen to competitive levels relative to OPEC, effectively challenging OPEC as the new swing producer. We maintain our view the upside to the oil price is limited to US$55/bbl and we will continue to see poor compliance to the agreed OPEC production freezes.

Robotic ETPs continue to see robust inflows, with inflows of US$20m last week and US$206m for this year so far (nearly 100% of AuM). Since the launch in October 2014 we have not seen a single week of outflows, indicating that investors see Robotics as a long-term investment. Other thematic styles such as Cyber security are garnering similar attention with inflows of US$56m year to date.

Gold ETPs saw outflows last week of US$43m, although net flows year to date remain positive at US$503m. Gold’s has risen 7.3% year to date, outstripping most developed market equities and bonds. Other precious metals such as silver and palladium have risen 11% and 18% respectively this year. We believe the mid-year fairvalue of gold is US$1300 due to heightened worries over fiscal and policy uncertainty coupled with inflationary fees. The biggest risk to gold is aggressive monetary policy tightening, pushing real interest rates into positive territory.

Despite the signing of Article 50, we saw little activity in GBP related ETPs, with minor outflows of US$0.4m. For the full year, inflows into GBP long ETPs stand at US$20m, representing a 33% rise in AuM, since the EU referendum in June 2016 we have seen a 200% rise in long GBP ETPs. This suggests that investors are adopting a contrarian position relative to the futures market where short positions on GBP are close to their all-time highs.

James Butterfill – Head of Research & Investment Strategy – ETF Securities