Oil weathering storm but still faces long-term shortages
While they believe the impact of Hurricane Harvey on energy commodities will be limited to the coming weeks, investors are predicting long-term gains in the oil price.
That's potentially good news for oil exporters Indonesia and Malaysia, but less so for oil-importing economies such as India, Japan and China.
Less than a week after Hurricane Harvey made landfall in Texas on August 25, the storm had knocked out a fifth of US oil refining capacity, equivalent to about 4 million barrels per day. In response, US gasoline futures (Nymex September contracts) were up 20% on a week earlier.
However, the storm provided investors with few short-term opportunities and will have no impact for long-term investors, said June Chua, portfolio manager at Hong Kong-based Harvest Global Investments in Hong Kong, as Hurricane Irma followed in its wake, albeit further east towards Florida and away from key oil production centres.
“Some [investors could] make money from a shorter-term trade. However, in [the] long term we believe it does not affect energy allocation for investors. The [oil] price should normalise in the next month or so after refineries resume production,” she said.
“Over the next 12 months, we believe oil prices will likely remain range bound, largely trading in the $45-$55 per barrel range,” said Tariq Ali, investment strategist in the wealth management business of Standard Chartered Bank in Singapore.
John Woods, chief investment officer for the Asia-Pacific region at Credit Suisse in Singapore, said he is long on oil in the short-term amid seasonally strong demand. While Hurricane Harvey is “net positive” for prices, he said, it is unlikely to have a long-term impact on them, "even if [the] supply and demand impact might last for several months.”
Alan Gelder, vice president for refining, chemicals and oil markets at energy analysis firm Wood Mackenzie in Singapore, agreed that the effect on oil prices would be temporary. About half of the refineries affected by the storm had restarted operations by September 3. He said this would reduce the call on the global refining system to cover the shortage.
Michael Coleman, founder and chief operating officer of RCMA Asset Management in Singapore, which manages the $185 million Merchant Commodity Fund, agreed the disruption would be brief.
“You are talking weeks rather than years. And it is happening in a world where global petroleum inventories are ample,” he said, noting the “armada” of tankers that travelled to the US from Europe and Asia to make up the supply shortfall.
Long-term imbalance
Over the longer term, the imbalance between supply and demand makes energy commodities – and oil in particular – attractive to investors, said Ali. “The long-term trend for oil prices is higher, in our view, as the demand-supply gap narrows.”
Geir Lode, head of global equities at Hermes Investment Management in London, agreed that the long-term supply shortage was a driver for oil prices and advocated playing this trend by buying energy stocks, which remain underpriced.
“[They] continue to lag the rest of the market,” he said; prices would be lower still “if some of the largest energy stocks did not have support of a high dividend yield.”
The story for these firms will likely reverse in the coming years as oil shortages increase stock prices for firms connected with exploration, extraction and refining, he added.
“Some of the largest oil companies only have between five and eight years of developed reserves in their portfolio. With oil demand expected to surpass 100 million barrels per day next year and to grow one to two percent per year thereafter, we believe there will be a production shortfall of five to ten million barrels in 2020,” Lode told AsianInvestor.
Gains in the oil price will take time to emerge and investors should be prepared for a bumpy ride, Ali said, noting that the demand-supply imbalance has been slower to materialise than many expected.
“A faster-than-expected recovery in US shale oil production and higher than expected production from Libya and Nigeria has offset the impact of Opec’s production cuts and robust demand from emerging markets,” he said. “We believe investors should be prepared for some short-term volatility while focusing on long term fundamentals”.
Woods sees upside in energy commodities in the mid-term but believes that inventories must be drawn down “more meaningfully” before this takes effect. The longer-term picture will depend in large part on the breakeven costs for US shale oil; the uncertain future impact of fracking technology is one reason these are hard to forecast, he said.
While the impact of Hurricane Harvey on prices is temporary, it raises questions around what role future US weather events could have on exacerbating supply shortages, said Gelder.
“These relate to the concentration of the US industry within a region prone to extreme weather when climate change is expected to make such weather events both more frequent and more extreme,” he added, as Hurricane Irma, the most powerful Atlantic storm in a decade, razed its way further east through the Caribbean, providing a reminder of other potential hazards.