Fund houses that have been underweight on commodities are now starting to take stock of changes in the underlying fundamentals.
Early this month, Royal Dutch Shell’s CEO, Ben Van Beurden said that he sees the first signs for recovery in oil prices. Van Beurden noted that with prices being depressed for a pronounced period, oil production outside OPEC and the US could decline due to cuts in capital expenditure, resulting in a drop in spare capacity. This can bring about supply shocks, especially with the politically-charged situation in Syria.
Peter Moonen, senior strategist for NN Investment Partners’ multi-asset arm, said last week: “There are some glimmers of hope. The worst of the oil market imbalances may be behind us, as non-OPEC production seems to have peaked earlier this year.”
“Further production declines, especially in the US, are expected in 2016 after capital expenditure and rig counts were cut aggressively. Oil rig counts in the US were cut by over 60% until June, from last year’s peak in October,” he added.
Moonen pointed out that there is a similar pattern in the metals space.
"The worst of the oil market imbalances may be behind us, as non-OPEC production seems to have peaked earlier this year."
“Glencore will reduce production capacity in zinc and, according to the International Copper Study Group, the production capacity in copper [across all producers] will be cut by an estimated 9% moving into 2016,” he said.
Moonen disclosed that while he expects the commodity downcycle to persist, he has already made changes to his equity allocation by upgrading the materials and energy sectors from neutral to a small overweight.
Alistair Way, Standard Life Investment’s head of emerging market equities, noted: “While falling commodity prices have put pressure on the beleaguered oil sector, some companies give scope for optimism. Refiners in global emerging markets, for example, offer better returns than their developed market counterparts, which suffer from overcapacity.”
He noted that the valuation of India-based oil marketing company BPCL is at an attractive entry level. The company is benefitting from India’s deregulation of diesel prices.
“This could herald a new era for BPCL. Increased focus on non-fuel revenue sources, such as convenience stores and ancillary services, offers further potential,” Way said.
And if numbers are anything to go by, it is interesting to note that while China’s economy is slowing, the country’s crude imports have spiked on the back of accelerated stockpiling activity.
Oil consultancy FGE, forecasted that Chinese crude imports would reach 6.75 million barrels per day, not far off from imports by the US at 7.3 million barrels per day.
India demand is also supporting the energy market. Year-to-date, its overall oil product demand grew by 7%, backed by strong demand from downstream gasoline, diesel and naptha markets.