Summary

• Oil price reacted to a continuation in the improvement of oil fundamentals
• Equities lagged the oil price move. We expect this gap to close
• US inventories are now looking light versus a five year average, on a days of forward cover basis
• US oil supply growth may undershoot expectations,  something that should help allay investor’s fears of oversupply in 2018
• Geopolitical risk to supply remains elevated

Market update

October was a strong month for oil prices with Brent up 7.5%. However, equities lagged for most of the month before catching back up during the final week. Fundamentals continued to improve as inventories continued to fall. US gasoline inventories remain at five year lows (days of forward cover – DOFC), and US crude inventories have now moved to “under stored”’ (v five year average DOFC) versus a 1.5% oversupply last month. The pace of the US inventory draw over the last four weeks suggests that the US market is actually very tight. This has been driven by all-time high US exports due to better foreign pricing versus domestic US pricing as well as low imports, particularly from Saudi Arabia. Demand has been moving at a decent pace as refiners are experiencing their best refining margins in five years and US gasoline demand is at five year highs. Recent supply emanating from onshore US has also been lower than many were modelling by possibly as much as 200-300kbbld. The continuing comments from OPEC and Russia that they will extend the cuts also adds to the recent more bullish sentiment towards oil. Saudi Arabia have also ratcheted up their export cuts which are currently outstripping their production cuts – an indication of their strong resolve. Geopolitical risks remain elevated with Kurdistan, Venezuela, Nigeria and Iran and Saudi providing the ongoing areas of focus.

Fund activity

The Fund attained most of its outperformance from Exploration and Production and its holdings in companies involved in lithium and battery production. Despite the positive move in the oil price, surprisingly little benefit came from holding Drilling or Service companies.

Outlook

We expect a continuation of strengthening oil fundamentals and consequently remain bullishly skewed towards the higher oil price sensitive areas. We believe that with the combination of much tighter inventories than we witnessed at the beginning of the year and the heightened geo-political risks, could lead to the possibility of a ‘risk premium’ returning to the market – something that could help the energy sector outperform the broader market!