Mackenzie Resource Team
- Global growth continued into the second quarter with the United States and China leading. Despite a negative overhang from contentious trade disputes, the US looks as though it will post solid growth rate for Q2.
- The June 2018 OPEC meeting came and went. An agreement to increase production was quickly absorbed by the market as a non-event. The world economy, and oil demand, remain strong while supply has been largely stable.
- North American natural gas continues to see stronger than expected demand growth.
- Global growth continued into the second quarter with the United States and China leading. Despite a negative overhang from contentious trade disputes, the US looks as though it will post solid growth rate for Q2. European economic growth stalled. While not in recession territory, the latest trade disputes are presaging softer, not stronger, numbers for Europe.
- On global trade, it will likely take time to fully assess the ramifications of the newly implemented tariffs on China. Although $30bn of trade, or even $200bn, is a small fraction of global economic activity, it may prove more destructive than the nominal value would suggest as the tariffs work their way through production/supply chains and create a multiplier effect. With inflation still low, incremental price increases should be passed on to the consumer. We are closely monitoring for disruptive tariffs that physically truncate supply chains since these could be more problematic and may result in price increases that are too large to pass through to the consumer.
- The June 2018 OPEC meeting came and went. An agreement to increase production was quickly absorbed by the market as a non-event. The world economy, and oil demand, remain strong while supply has been largely stable. We believe OPEC's action will be a stabilising factor, preventing oil prices from running away and causing demand destruction.
- US shale oil growth has hit some speed bumps of late. As the portfolio managers have stated in the past, we do not believe that previous years' growth rates are sustainable going forward. The industry is already facing several pipeline, export, water handling and other bottlenecks. Rapid growth from the US shale basins has been a psychological overhang for the price of oil over the last several years as many view it as having an "on/off" switch that can mitigate any upward trajectory in the oil price. As the market realizes that there are limits to US growth, higher-for-longer prices may be factored in the market valuation of energy stocks.
- North American natural gas continues to see stronger than expected demand growth. In fact, LNG demand has never been better. North American natural gas stocks continue to discount subdued prices for many years to come. The current level of complacency is surprising. We suspect the market believes there is infinite supply to match any level of demand growth. Hence natural gas stocks are not yet pricing in even mid-cycle level pricing. As the world moves towards cleaner, lower carbon-emitting sources of energy for growing populations, we continue to believe that natural gas deserves to be a feature sector within our portfolio.
Outlook & Strategy
- OPEC announced increased oil supply just as we now enter the seasonally strongest months of the year for oil demand. We do not see the current oil price as a hinderance for continued demand growth and believe a scenario where oil prices remain range bound around current levels would sustain current demand. More importantly, if energy equity valuations begin to price-in current oil prices, E&P energy companies could offer as much as 50% upside according to our estimates.
- With the "fall season" of investing (late stage of growth in the economic cycle) clearly now underway, resources should continue to outperform. The focus will quickly turn to how long this stage lasts. The longer we stay in the fall season, the more opportunity commodities will have to continue outperforming the broad market. By time, this economic expansion should have been long done. But subdued broad inflation, wage growth, and capital investments leads us to believe that this cycle has not yet reached maturity. The portfolio managers continue to monitor several key indicators for warning signs that the cycle could be reaching maturity. Until some of these indicators manifest themselves, the managers expect more growth from the world economy.