by Jason Bloom, Global Market Strategist, PowerShares by Invesco

As I travel around the country to meet with institutional clients, I often hear this question: “What is everyone selling? Because that’s something I’m really interested in buying.” These are clients who have the confidence and experience to contradict the herd mentality that causes many investors to chase market returns (which often results in buying near market tops while selling near market bottoms).

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That question is my cue to start talking about commodities.

In a recent blog, I encouraged investors to stay focused on commodity fundamentals, which have improved dramatically over the past few months. But investors seem to have been distracted by the short-term price volatility in energy markets this spring.

  • Figure 1 shows a new wave of selling in commodity exchange-traded funds (ETFs) since March, while at the same time the oil price has stayed within its recent range.
  • Figure 2 shows that, as we expected, US crude oil inventories have dropped since March 2017 due to cuts by the Organization of the Petroleum Exporting Countries (OPEC). There was a marked delay between OPEC’s November agreement to cut production and a visible drop in US inventories. However, by the end of May 2017, the net change in inventories was 26 million barrels less crude than the prior four years’ average. Given the dynamics of supply and demand, I believe this type of cut in inventories will help support crude oil prices, which may bode well for commodity investors. More on that below.

Investors have been leaving commodities …

Crude Oil Commodities

Sources: Bloomberg L.P., Morningstar, as of June 6, 2017. The blue line measures cumulative flows into Morningstar’s Commodities Broad Basket ETF category (including only ETFs that were incepted before Dec. 31, 2015, and excluding exchange-traded notes and other exchange-traded debt instruments).

… at the same time that energy fundamentals have been improving

Energy fundamentals

Source: Bloomberg L.P., as of June 7, 2017. Inventories for 2013–2016 are measured from March 31 through June 23 for each of those years. Inventories for 2017 are measured from March 31 through June 2.

Supply trends could support oil prices

Interestingly, but not surprisingly, OPEC’s most recent cuts to US-bound oil shipments resulted in a shrinking spread between West Texas Intermediate (WTI) crude oil, which is the US oil benchmark, and the higher-priced European benchmark Brent crude oil. That’s because energy traders assumed that oil not sent to the US would probably end up in Europe in the near term, raising prices in the US while pressuring prices lower abroad. Indeed, this spread has moved significantly over the past week, as WTI went from trading $2.96 per barrel less than Brent on May 18 to only $2 less on June 7.1

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