Summary

• Oil continued its run higher supported by strengthening fundamentals and turbulent geopolitics.
• OECD Inventories are now normalised, whilst non-OECD are understored.
• The US, Britain and France launched airstrikes against the Iranian/Russian backed Assad Regime.
• The Iranian sanctions deal looms (May 12th). If sanctions return 500kbbld-1Mbbld could be removed from a very tight market.
• The fund had a strong month, outperforming the S&P by almost 10% and outperforming its benchmark.

Market update

Crude oil continued its ascent, buoyed by strengthening fundamentals and increasing turmoil in oil producing regions, most notably the Middle East and Venezuela.  The April International Energy Agency (IEA) report confirmed a continuation of the tightening inventory situation for February. Whereas the IEA data lags by two months, live inventory data from the US puts their storage at 10 year lows, on a days of forward demand.

Fund activity

The Fund’s outperformance not only emanated from the highest oil price sensitive sectors (drilling, services and exploration and production), but also from selection within some of the lower oil price sensitive areas (shipping and refining). Our investments in the lower oil price sensitive were helped by two stocks in particular, Golar LNG and Andeavor. The refining company, Andeavor subject to a bid from Marathon Petroleum at the end of the April, rising 37% over the month. 

Outlook

It is interesting that investors are starting to come around to the cyclical dynamic that is at work within the sector and the fact that they are starting to look at both the valuation chasm that has opened up between energy focused industrials and industrials outside of the energy space.

Investors are also being attracted to the energy sector as it offers a potential hedge versus the very real issue of Middle East geopolitical risk, a risk that will manifest itself in an oil price risk premium. 12 months ago, the record inventory levels insulated the market from this risk, but now that global inventories are low, that insulation has gone.

With supply looking challenged over the next three years (at least, due to the lack of oil projects coming to market). The probability for a multi-year cyclical pick up look strong.