12 August 2013

Africa: Oil Price Rally Lures Investors Back to Energy ETPS in July

A strong rally in the price of U.S. crude in July coupled with a general improvement in the American economy has encouraged investors to return to energy exchange traded products (ETPs) after several months of outflows.

Some $142 million was invested in energy ETPs in July, according to data from BlackRock, the world's biggest asset manager. This follows outflows of $90 million in June, $48 million in May, $89 million in April and $423 million in March. By contrast, some $2.6 billion was withdrawn from gold ETPs in July while industrial metals ETPs lost $157 million. ETPs, whose value is linked to moves in their underlying assets, are an easy route into commodities for investors and allow asset managers to make swift tactical switches.

"Generally investors have been cautious on commodities due to the poor performance but energy has bucked the overall trend and done quite well," said Russ Koesterich, chief investment strategist at BlackRock. He said energy had held up better than industrial metals because these tend to be more influenced by Chinese demand, and China's economy has been slowing. "But energy is still very driven by the U.S. economy and while it is not growing at gangbuster rates, we are seeing a gradual improvement."

On the supply side, he cited the unexpectedly large drawdowns in U.S. crude oil inventories at delivery hub Cushing, Oklahoma in July, with strong demand from U.S. refineries.

This kickstarted a rally in U.S. crude oil futures that saw prices rise by almost $9 a barrel in the month, to end July at more than $105 a barrel. The S&P GSCI Energy index was also up 7.1 percent in July. "There has also been a lot of production coming offline in the Middle East and Africa, in Nigeria and Libya, and a significant reduction in Iranian exports, so there has been more of a bid in the energy complex than other parts of the commodity sector," Koesterich said.

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