February saw oil prices continue their rebound as the Fund finished the month almost 14% up YTD, its strongest start to a year since inception. 

• During February oil prices continued their rebound, moving another 8% higher.
• We are now seeing the effects of four years of spending cuts, initiated in 2015, begin to take effect and we are entering a multi-year phase of the cycle when the world’s oil’s supply growth is almost exclusively dependent on US shale, a supply source that increasingly looks inadequate from both a volume and quality standpoint.
• Much of the concern within the industry is that we will not have sufficient supply of the heavier grades of crudes which are richer in the middle distillates, including diesel, meaning that the spread between diesel and gasoline will be pushed higher.
• In Q4 2018, we anticipated a supply issue to manifest itself in Q1 2019 - we are now beginning to witness the impact of those lower Saudi exports and weakening US production growth. The final weekly inventory figures of the month from the US showed the single largest negative divergence from the seasonal average on record – a potentially bullish signal.

Outlook

Outside of OPEC and the US, it is beginning to become clear that years of underinvestment are taking their toll on a number of non-OPEC regions such as Brazil and Mexico. Brazil started the year with a significant supply miss in January (-600kbbld v estimates) and Mexico dropped a 100kbbld versus December’s supply number).

Russian Energy Minister Novak recently underlined his country’s commitment to the OPEC+ reduction, promising to cut oil production by 228kbbld, on top of their January cut. This will offset oil returning from the Libyan Sharara oil field, having been offline for a number of months due to security issues.

OPEC compliance to the recent cuts stands at 101%, despite stronger Nigerian and Iraqi production. Saudi’s oil Minister al Falih has intimated that the cuts will likely be extended beyond June.

The OPEC ‘cuts’ should be taken in context; Saudi had been running spare capacity down to almost record low levels and their inventories had fallen to their lowest in seven years – hence ‘cuts’ came from levels of production, which were evidently unsustainable.

We anticipate that the global supply deficit in H2 2019 c.1Mbbld will mean that Saudi may have to reduce the extent of their cuts and increase production back up to 10.4Mbblsd.

It certainly appears that OPEC have wrestled back the initiative with regards the oil price.  As stated by Ned Davis, a research team we use, “fundamentals, technicals, sentiment and seasonality are all leaning bullish”.

Fund activity and performance

In order to benefit from concerns around supply of quality crudes, the Fund increased its weighting to the benefactors, i.e. complex refiners and a producer of syncrude.

The Fund moved a couple of percent higher and registered a modest outperformance driven by equipment and services, E&P and refining and marketing. Year to date the Fund is outperforming the benchmark and the S&P, finishing February up almost 14% – the Fund’s strongest start to the year since inception.