Carmignac: Oil most bullish commodity for 2016

Michael Hulme, manager of Carmignac’s Portfolio Commodities fund believes that after the difficulties of the past twelve months for the energy sector, that the supply reduction from US shale names will be sufficient enough to push oil upwards in 2016.

“We consequently believe we will see a noteworthy rebound in oil prices as we progress through the year. That has given us room to gradually add to oil related stocks meeting our investment criteria,” he said.

Hulme believes that the laws of supply and demand should bring things into balance in 2016 particularly with US exploration and production capital expenditures budgets cut for 2016 and the rig count continuing to fall this should see meaningful production declines this year from the US shale basins.

Outside of the US Hulme believes that it is difficult to see where the supply growth could come from. Saudi and Russian volumes are close to capacity and expected increase in exports from Iran (500k barrels a day), are overestimated.

“The country has, according to our sources, already been exporting a considerable part of its excess production via Iraq. While global demand growth should add 1.2% to demand, overall the supply demand imbalance could tighten by close to 2%.”

“The world needs more oil every year as its population grows, given the 80 million more people per year who will consume it, irrespective of energy efficiency measures.”

As a result of its stance Hulme believes that investors in the sector should prioritise businesses with strong management, a proven ability to generate positive returns through the whole cycle and that are not excessively leveraged.

He added: “Oil sands producers like Suncor Energy, who have stable production and low maintenance capex (unlike shale producers who must spend to keep the oil flowing). Shale exploration and production companies with strong balance sheets that can keep their production flat with low capex in a bear market, and will benefit from their capacity to utilize the available resource more effectively. Our favoured names in this segment are Anadarko, EOG and Hess. Oil services sector via diversified services companies with strong proven management and a technological edge such as Schlumberger and Halliburton. Oil and gas storage and transportation companies, which benefit from long-term cash flow visibility such as Enbridge.”

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