Steadily rising oil prices on the back of global geopolitical tensions have made oil ETFs the strongest performers within the commodity basket over the past month, with returns of 9.3%, but flows into the sector remain subdued as investors continue to harbour fears.
TrackInsight data over the month to 19 April shows ETFs tracking oil prices have remained in outflows over the past month, as can be seen on the chart below, despite the strong jump in performance resulting from expectations that geopolitical turmoil will cause further falls in oil supply.
Brent crude prices have reached a three-year high of $74 per barrel as the threat of a drop in global demand looms: Venezuela’s oil production is dropping, both Iran and Russia could be hit with new sanctions on oil, and tensions in Saudi Arabia are high after a recent missile attack.
Meanwhile, the Organisation of Petroleum Exporting Countries (OPEC) continues to stick to production cuts to drive prices higher. According to Reuters, key oil exporter Saudi Arabia would be happy to see oil prices continue to rise to $80, or even $100 per barrel, which could mean the supply cuts will remain in place to push oil prices further up over the coming months.
The agreement to reduce the supply of oil was made between OPEC, Russia and sever other exporters in January 2017 and has since been extended until December 2018, with the representatives meeting in June to review the decision. However, it is not expected that production cuts will be removed, and there are reports that OPEC and Russia are considering extending them for as long as the next 10 or 20 years.
Investor demand remains subdued
However, the promise of potential longer-term price rises has yet to provide a meaningful boost to demand, with cumulated outflows for the month to 19 April sitting at $58 million, while year to date the sector has seen outflows of €147 million, despite returning nearly 10% over the period after the recent price jumps.
However, flows into Energy Stock ETFs have benefitted from rising oil prices, particularly over the past week. The sector is up 7% over the month and has taken in €224 million during the period (see chart), suggesting investors are still seeking ways to gain access to this space.
Meanwhile, multi-commodity ETFs as a whole have been seeing a steady rise in inflows over the past month, bringing in €428 million, despite overall returns for these products sitting lower than specialised oil investment vehicles. Over the month to 19 April, Multi Commodities ETFs have returned 3.7%, according to TrackInsight.
Trade fears affecting demand?
According to Bloomberg, it may be the fears of a trade war between the US and China that are negatively affecting demand for oil-related commodity ETFs, as investors fear a hit to global economic growth if the conflict continues to escalate. Over the past couple of months, these tensions have caused sell-offs in both equity and commodity markets, with investors seeking refuge in safe haven assets.
As a result, the largest proportion of commodity inflows year to date has gone into gold ETFs, which are being used to protect portfolios against a market rout. Over the period, gold ETFs have taken in nearly €3 billion, despite returns remaining lacklustre (see below).