Multi-manager verdict: What next for oil prices?

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James de Bunsen, fund manager, Henderson Global Investors multi-asset team

At the moment I see no clear-cut catalyst to trigger a move to materially higher oil prices. Today’s levels are based on a fragile agreement between Opec and key non-Opec producers to keep supply in check. Moreover, oil prices above $60 per barrel pave the way for a huge amount of mothballed US shale production to come back on stream as many projects are profitable above that level. Such increased supply would at the very least put a lid on any potential price rises. Demand appears relatively robust in an improving global economy but not enough to bring forward any likely equilibrium in an over-supplied market.

Even if you have a strong view about another leg-up in oil prices, executing that view in an efficient manner is tricky. Taking physical ownership of several thousand barrels is clearly impractical, while exchange-traded products can have undesirable return characteristics (because they invest in futures contracts that must be traded every month, often at a punitive cost). Energy equities can give you a geared return based on a recovery in oil prices but, again, you are moving away from a simple call on the direction of the price move due to idiosyncratic stock risks such as capital misallocation or dividend sustainability.

Our only exposure to oil is a global equity fund with a relatively high weighting towards quality energy-producing equities, plus a diversified commodity strategy that benefits from oversupply and high storage costs.

Sheldon MacDonald, Deputy CIO, Architas

The oil price saw some dramatic moves in 2016. Overall the price went up by more than 50 per cent in the calendar year, albeit off a depressed base. However, it does appear to be settling in the $50 to $60 per barrel area. This
stability has been good for markets after a dramatic rise.

We now expect a relatively stable oil price after a turbulent 12 months. Any increase in the price would likely bring a supply response, mostly from the US fracking industry, which can easily turn the taps back on. We have entered a new era when Opec can no longer exert the same level of supply and price control.

As we saw with the latest Opec meeting, at which it agreed to output cuts, there was a temporary boost to the price, but it fell away quickly again.

When combined with trumpflation from the US President’s expansionary plans, the oil price is going to push through into rising inflation, at least in the short term. This will lead to expectations for further rate rises this year. As such we are maintaining our short duration position across portfolios.

In terms of our direct oil exposure we prefer availability-based plays, where companies are paid for providing the service, such as oil pipelines, rather than demand based. Our expectation is that these suppliers wouldn’t be impacted too directly by any changes to the oil price.

Justin Onuekwusi, Multi-index fund manager, Legal & General Investment Management

Oil market uncertainty has plummeted following the announced cuts from Opec. With Russia also joining in, the world has ended up with relatively low oil prices, which should be supportive of economic growth. The market expects prices to gradually rise from here, helping dispel deflationary concerns.

But we remain wary of the downside risks to oil. If there is less compliance with the announced cuts than expected, or if US shale production picks up quickly, the market will question Opec’s commitment to price stability. Significant oil price increases are likely to be more limited from here unless there is a major geopolitical event that disrupts supply.

Despite the downside concerns, it is unlikely the oil price will be a major driver of macro sentiment in 2017. China credit risks, European politics and US rate hikes are more likely to dominate headlines. As such, we continue to hold assets that should benefit from gradual increases in the oil price.

High-yield bonds are one such asset class. Energy prices have been a key driver of returns for high-yield bonds over the last few years, which is likely to continue. In our lower risk Multi-Index portfolios, we are also allocating to global inflation-linked bonds to help provide some protection should we see higher oil prices feed into inflation expectations. In our higher risk portfolios, we are biased towards the energy-heavy, UK equity market.