Extremely cold temperatures in North America encouraged investors to put almost $300 million into energy futures exchange traded products (ETPs) in February, as they sought to capitalise on strong demand for natural gas and US crude.
Another $1.6 billion was invested in energy equity ETPs, according to the latest global data from BlackRock, the world's biggest asset manager. ETPs, whose value is linked to moves in their underlying assets, offer an easy route into commodities for investors.
The inflows are a turnaround from January's $202 million net outflows from the energy sector, and reflect a strong rally in natural gas in mid-February as North America's cold spell continued, as well as a 5 percent rise in US crude. The S&P GSCI Energy index ended the month up 3.7 percent.
"We saw very strong inflows into long natural gas on the back of the continued freezing weather in the US and the expectation of further price increases," said Nick Brooks, head of research and investment strategy at ETF Securities, an issuer of ETPs.
Refiners' consumption of crude also increased as they tried to meet demand for heating oil, reducing inventories at Cushing, Oklahoma to a four-month low.
Interest in commodity ETPs improved in February due to better price performance, with the S&P GSCI up 4.5 percent. But volumes remained modest, with $149 million invested in broad commodity ETPs and $1.2 billion in commodity ETPs in total.
Asset allocators preferred developed equity ETPs over commodities, with Japan and pan-European equity ETPs particular favourites, said Dodd Kittsley, head of ETP research at BlackRock.
"Flows into commodity ETPs have been largely driven and supported by gold inflows in February," he said. "As the price of gold rebounded, gold ETPs gathered $0.5 billion, a reversal from 13 consecutive months of outflows since January 2013."
The S&P GSCI Gold index was up 6.6 percent in February and is up 9.9 percent in the year to date. Kittsley thought that support for safe haven assets would persist as long as investors expected interest rates to remain low and geopolitical tension between Russia and Ukraine to continue.
The best performing sector in February was agriculture, up 9.3 percent, S&P GSCI said. The poor weather and the crisis in Ukraine - a major wheat and corn exporter - prompted a revival of investor interest, with $49 million of inflows. "There are concerns about a potential disruption to Ukrainian exports," said Brooks.
Ole Hansen, head of commodity strategy at Saxo Bank, said that adverse weather in Brazil and the United States had supported coffee, sugar and soybeans. He noted a 40 percent rally in Arabica coffee and a 13 percent rise in sugar due to an extreme drought in Brazil.
These very strong price moves attracted tactical investors. "In the US, the cold weather lifted the price of wheat after concerns that the winter crop could be damaged," he added.
Inflows into long wheat products on the ETF Securities platform have continued into March, Brooks said, whilst palladium is attracting interest due to the possibility of restrictions on Russian exports.
But despite the improved price performance in commodities, many investors remain on the sidelines following a run of poor macroeconomic data.
"Part of the problem is that in the first two months of the year the data from the US was highly distorted by the cold weather," Brooks said. "Investors entered the year very bullish but then we got this bad data, and a lot of them are confused and waiting for clarity."
At the end of February, BlackRock's data covered 900 commodity ETPs world-wide, worth some $122.9 billion.
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