World Energy Fund Commentary
For several quarters, oil inventories around the globe have been drawing down as demand has exceeded supply. In many cases, global inventories had fallen well below historical averages, even before the Russia-Ukraine war. OPEC+ continues to manage supply, and perhaps a bit of an under-the-radar fact is OPEC+ has been either unable or unwilling to meet its quotas for several months even as prices rose in an undersupplied market. Now, with world oil demand likely to approach an average of 100 million barrels a day for 2022, oil from a major source, Russia, is no longer finding a clear path to markets. For context, Russia produces about 11 million barrels of oil per day. Nearly 5 million of those barrels have been exported to the U.S. and Europe in the form of crude oil or refined products. With major oil companies unwilling to buy Russian oil and products, we’re seeing a price spike. Prices are up 33% for the first quarter to $100 for West Texas Intermediate crude because there just isn’t enough non-Russian oil available to satisfy global demand. U.S. producers, the only potential source of short-term additional supply outside of OPEC+, have not responded because of labor and equipment shortages, coupled with investor demands that excess cash be returned to shareholders.
Positioning the World Energy Fund
Portfolio composition is subject to change.
We remain overweight fossil fuel stocks, with a particular emphasis on oil field service companies along with exploration and production companies. We continue to see opportunities for companies to outperform in this environment of higher crude oil prices. Although oil futures prices for 2023-2025 have risen, stocks still reflect lower long-term oil prices than the oil prices futures curve is indicating. As a result, we continue to see value in oil stocks. We have also maintained our exposure to alternative energy despite the poor performance of this sector year to date. We believe the oil price spike we’re currently experiencing will encourage a continued search for alternatives. We have also added to some marterials stocks that we believe will benefit from a potential nuclear renaissance along with some additional equities that should benefit from the expansion of electric vehicle utilization as part of our alternative energy allocation.
Morningstar Star Rating
Overall Morningstar Rating TM out of 69 Equity Energy funds (for the overall period, Institutional Shares)
Morningstar star ratings are based on risk adjusted total returns.
Why should investors consider investing in this Fund?
Cheap energy remains the lifeblood of economic development. Emerging markets continue to seek the least expensive source of energy they can find to improve the standard of living in their countries. In addition, developed nations are now trying to balance suppling energy to their consumers while investing in technologies to reduce greenhouse gas emissions. After years of underinvestment in fossil fuel production, we believe prices are likely to remain elevated and we expect WTI crude to remain above $85 for a significant period, creating a boost for energy stocks. In addition, we believe higher oil prices are likely to lead more consumers to consider electric vehicles as well as other alternative energy sources. The transition to cleaner energy is fraught with risk as we’ve seen in Europe where an energy crisis was developing even before the Russia invasion of Ukraine. This should cause a reset among EU counties to secure fossil fuel and alternative resources. We believe this benefits our fund, where we invest in both fossil fuel and alternative technologies.
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