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Oil ETF flows have represented an excessively volatile underlying market.
James Butterfill, head of research at ETF Securities, says investors have been ‘taking advantage of the volatility’ and been well advised in selling at the highs and buying at the lows. He says that during 2016, on occasion, there has been as much as $400 million of inflows only to see a similar amount take advantage of the turnaround as the oil price topped out.
The supply glut that has been prevalent has brought about a price ‘contango’ where the futures market price rises above the current price. James explains more about what this is and discusses the implications of this on the flows that ETF Securities has seen.
Into 2017, James talks about this supply surplus turning around and the possibility the oil price may fall into ‘backwardation’. This is when pricing in futures contracts fall and spot prices then start to trade higher than futures causing demand for oil held in storage.
James also discusses supply surplus in 2017. Looking ahead, he thinks inflows have started to trickle back in again on expectations the price of oil will continue on its recent trajectory, However, ETF Securities cautions against this scenario. James says he believes it will be hard for the price of oil to rise much above $55 a barrel because the higher the price, the more likely it is that other higher cost producers will begin to return. He says this set up will bring the US shale producers back in and it is this group that will become the swing oil producer in 2017.
In summary, James says it is likely to be a subdued picture for the price of oil in the first half of 2017, but come the second part of the year, the recent reluctance of oil producers to spend money on capital expenditure will begin to make itself felt.