Oil at $70 does not signal return of a supercycle, IEA says

Global oil markets are not riding a supercycle for commodities, even as prices have traded close to $70 per barrel in recent weeks, the International Energy Agency said in its latest monthly market report.

The Paris-based agency warned of "ample inventories" that accumulated in the second quarter of last year, compared with historical averages.

"Oil’s sharp rally to near $70 per barrel has spurred talk of a new supercycle and a looming supply shortfall. Our data and analysis suggest otherwise," the IEA said on Wednesday.

"By the end of January, OECD industry stocks, at 3,023 million barrels, were still 110 million barrels higher than a year ago – at the onset of the Covid crisis."

The IEA expects world oil demand to recover 63 per cent of the volume lost in 2020 due to the pandemic. Demand is expected to rise by 5.5 million bpd in 2021 after contracting 8.7 million bpd last year.

In contrast to estimates by other organisations, the IEA sees consumption picking up in the first quarter of the year due to cold weather in northern Asia, Europe and the US.

Opec, in its monthly oil market report, had a higher demand estimate for crude at 5.9 million bpd but backloaded much of the expected growth to the second half of the year.

The Vienna-based exporters' group lowered estimates for the first half of the year lower due to movement restrictions to control the spread of Covid-19 in parts of Europe as well as to account for higher unemployment rates in the US.

The IEA expects a strong return to growth this year.

"Global oil demand was stronger than expected at the start of the year, boosted by colder weather and improved industrial activity in the US and elsewhere," the agency said.

It expects global oil demand will return to pre-Covid levels by 2023.

Oil inventories will continue to decline, supported by stronger demand and continued action by Opec+, the group that includes Russia and other non-member producers.

The alliance is cutting 7.2 million bpd of production until the end of April, supported by an outsized contribution of 1 million bpd from Saudi Arabia, its biggest exporter.

International benchmark Brent and West Texas Intermediate have gained 30 per cent since the beginning of the year, when news of vaccine distribution and a weak dollar moved the needle on prices.

Brent and WTI are over 110 per cent higher than their values year-to-date.

Brent was down 1.21 per cent at $67.56 per barrel by 3.13pm UAE time, while WTI was down 0.99 per cent at $64.16 per barrel.

What is an ETF?

An exchange traded fund is a type of investment fund that can be traded quickly and easily, just like stocks and shares. They come with no upfront costs aside from your brokerage's dealing charges and annual fees, which are far lower than on traditional mutual investment funds. Charges are as low as 0.03 per cent on one of the very cheapest (and most popular), Vanguard S&P 500 ETF, with the maximum around 0.75 per cent.

There is no fund manager deciding which stocks and other assets to invest in, instead they passively track their chosen index, country, region or commodity, regardless of whether it goes up or down.

The first ETF was launched as recently as 1993, but the sector boasted $5.78 billion in assets under management at the end of September as inflows hit record highs, according to the latest figures from ETFGI, a leading independent research and consultancy firm.

There are thousands to choose from, with the five largest providers BlackRock’s iShares, Vanguard, State Street Global Advisers, Deutsche Bank X-trackers and Invesco PowerShares.

While the best-known track major indices such as MSCI World, the S&P 500 and FTSE 100, you can also invest in specific countries or regions, large, medium or small companies, government bonds, gold, crude oil, cocoa, water, carbon, cattle, corn futures, currency shifts or even a stock market crash.

The specs

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Heather, the Totality
Matthew Weiner,
Canongate

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How to invest in gold

Investors can tap into the gold price by purchasing physical jewellery, coins and even gold bars, but these need to be stored safely and possibly insured.

A cheaper and more straightforward way to benefit from gold price growth is to buy an exchange-traded fund (ETF).

Most advisers suggest sticking to “physical” ETFs. These hold actual gold bullion, bars and coins in a vault on investors’ behalf. Others do not hold gold but use derivatives to track the price instead, adding an extra layer of risk. The two biggest physical gold ETFs are SPDR Gold Trust and iShares Gold Trust.

Another way to invest in gold’s success is to buy gold mining stocks, but Mr Gravier says this brings added risks and can be more volatile. “They have a serious downside potential should the price consolidate.”

Mr Kyprianou says gold and gold miners are two different asset classes. “One is a commodity and the other is a company stock, which means they behave differently.”

Mining companies are a business, susceptible to other market forces, such as worker availability, health and safety, strikes, debt levels, and so on. “These have nothing to do with gold at all. It means that some companies will survive, others won’t.”

By contrast, when gold is mined, it just sits in a vault. “It doesn’t even rust, which means it retains its value,” Mr Kyprianou says.

You may already have exposure to gold miners in your portfolio, say, through an international ETF or actively managed mutual fund.

You could spread this risk with an actively managed fund that invests in a spread of gold miners, with the best known being BlackRock Gold & General. It is up an incredible 55 per cent over the past year, and 240 per cent over five years. As always, past performance is no guide to the future.