Oil fund view of Japan crisis

Angelos Damaskos, chief executive officer Sector Investment Managers and fund advisor, Junior Oils Trust, sees Middle East instability rather than the Japanese crisis as a driver of energy prices.

The horrific earthquake in Japan has hit the World’s third-largest economy hard and, in weeks to come, the consequences will be felt in other parts of the world. The Bank of Japan reacted by pumping 183 billion dollars equivalent into the economy and many observers speculate that further quantitative easing may be required elsewhere.

Instability in the Middle East has raised the price of oil and increased the prospects of higher inflation. The sovereign debt problems in the Eurozone have emerged again and the ECB has announced new debt restructuring packages for the weaker members.

Medium term, these events are supportive of higher oil prices. The temporary shut-down of nuclear facilities in Japan will boost the need to import oil, LNG and coal and the disaster raises questions over the safety of nuclear power worldwide. It is likely that regulators will put the brakes on permitting new projects, and add new constraints to designs that will cause delays. The continued unrest in the Middle East is probably going to be a more important driver of oil prices in the medium term, despite the risks to global economic growth posed by the Japanese situation.

We believe that oil companies with reserves in safe political regions will attract a premium in the sector. Focusing on those with outstanding growth potential, strong management and a solid balance sheet is likely to provide better returns. The Junior Oils Trust is invested in such companies but also holds significant cash levels that will enable us to buy into market weakness. We have recently invested approximately 9% of the portfolio in some high-yielding bonds of oil companies. These bonds provide the fund with average annual yield of 12.5% and reduce the overall volatility of the portfolio. We maintain a flexible approach and may switch this investment back into equities once the cash available has been employed.

The Junior Oils Trust continues to be the best-performing energy fund in the UK over a 12-month period delivering a gain of 45.1% (as at 28 Feb 2011)*, compared to an increase in the WTI oil price of 21.7% and 11.9% for the fund’s benchmark, the FTSE 350 Oil & Gas index.
* Source: Bloomberg


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