Summary

• Oil prices moved higher in July and the Fund outperformed its benchmark
• Largest four week inventory draw on record for the “big three” in the United States
• The Fund has increased its weighting to companies exposed in the roll-out of electronic vehicles.

Market

The Fund had a good month moving over 5% higher and outperforming the benchmark as the oil price rebounded 8%.  Oil fundamentals have certainly been strengthening and we have seen considerable inventory draws in the US. Levels of the “big three” (gasoline, distillates and crude) have fallen by over 39 million barrels, the single largest four week decline ever.   We continue to believe that inventories will continue to draw in the second half of the year, something that should bolster the oil price.

Strategy

We have increased the Fund’s holdings with exposure to the roll-out of electric vehicles (EVs) to 17%. These stocks have exposure to lithium, nickel, manganese and cobalt (NMC) batteries and liquefied natural gas (LNG) infrastructure meaning a lower oil price sensitivity (OPS). The Fund’s OPS, although high, has been pared back to 1.44. 

This is not because we are bearish regarding the cycle but because we feel there are certain areas of the EV rollout that look compelling.  Supply constraints of commodities used in the manufacture of EVs and the reliance on coal power generation impacts the efficacy of the EV roll-out. These factors will come under increasing focus as the fleet size increases from its current 0.2% share to something more meaningful.  Consequently we have focused our attention on investing in the way the market will be forced to address these issues. 

We have also invested 6% of the Fund in lithium mining companies and continue to hold almost 10% in companies that will benefit from the roll out of the cleanest carbon based fuel available for power generation, LNG. 

Outlook

This month we have heard some interesting noise from politicians and companies regarding the long term roll out of EVs. Chinese owned Volvo announced that every car they launch from 2019 will contain an electric motor. French President Macron announced that you will no longer be able to buy a petrol or diesel car in France by 2040 and the UK’s Michael Gove matched France’s ambitious proposal.

However, it will be some years before EVs will implicate oil demand with any great significance as gasoline demand in the US continues to hit new highs, up 2.3% year on year.  The EV market currently makes up 0.2% of the global fleet, but 90% of the mind-set, so the biggest impact it is having right now is on oil supply. The idea that we are seeing the ‘death of oil demand’ is about as pervasive as the idea that we were seeing the ‘death of oil supply’ 10 years ago.

It is becoming increasingly likely that this thinking is keeping oil prices below the level needed for oil companies to sanction the necessary long cycle projects that will be needed to deliver first oil by 2019-2020, something that will inevitably drive oil prices higher.