Outperformance was predominantly through the selection of companies within the exploration and production (E&P) and transportation and storage sectors and an overweight stance within the drilling sector. The previous strength in holdings that will benefit from the growth in EVs such as lithium and cobalt miners and batteries, waned slightly this month.
The top performing stocks came from a range of subsectors including Permian focused E&P companies (Wildhorse Resources, Energen), gas infrastructure (Golar LNG) and service companies (Propetro). Royal Dutch Shell also put in a solid performance, following an update at its management day, when it removed the scrip element of its dividend as it is approaching its targeted reduction in gearing. Shell’s free cash flow looks as though it will easily exceed its cash dividend to 2020, something that will help its gearing fall at a faster rate than many had modelled previously.
The biggest news emanated from the outcome of the OPEC+ meeting held in Vienna on the 30 November. OPEC+ (the original members as well as Russia and nine other non-OPEC producers) extended the 1.8Mbbld cut for a further nine months through to the end of 2018. Although the meeting lacked some of the fireworks of the last two, there was a dusting of bullish additions, most notably the caps on Nigerian and Libyan production at 2.8Mbbld versus current production of 2.7Mbbld. Prior to the meeting, we felt that the scope for Libya and Nigeria to increase production in 2018 was limited and in fact expected a drop with data suggesting the two countries are at 91% production capacity. Libyan security issues continue and a persistent lack of infrastructure investment will likely take its toll. Meanwhile, the Niger Delta avengers have recently vowed to resume their attacks on oil and gas installations, raids which managed to remove more than half a million barrels from Nigerian production in 2017. In fact much of the OPEC block will probably struggle to raise production once the cut is lifted. Currently, only three OPEC countries are ‘voluntarily’ cutting - UAE, Kuwait and Saudi Arabia, hence the Saudi Energy Minister al Falih can now assert, with a degree of confidence, that when the return comes, “it will be gradual”.
The market took the announcement in its stride as the outcome had been broadly anticipated and the oil price had appreciated into the meeting, rallying over 40% since June and 4% in November.
OPEC continues to target OECD inventories, looking to drive them back to five year averages. It is therefore worth focusing on OECD inventories and how they have moved during the month. OECD inventories for September fell to their lowest level in almost two years to 2.97bn barrels but remain 4% above the normalised level, based on days of forward cover. The IEA report has a two month lag so it’s useful to also look at how the US is faring. The US is the most important country with regards storage and it reports data weekly. Crude inventories are now back to the five year average and only 5% above their 2012-2015 average that the IEA are using as a ‘normalised level’. Looking at total inventories in the US for crude, gasoline, kerosene and distillates, days of forward cover are also continuing their path of tightening and are now 2.8% under stored, and in line with the 2012-2015 average.
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