In January there was a two mile “queue” of 39 oil tankers off the coast of Houston that were simply storing oil rather than delivering it. It was estimated that globally 100 million barrels of oil were being stored at sea in tankers as China had run out of storage space on land for its oil reserves.
With sanctions lifted, Iran was back in the oil production business and as a result a further 3.3m barrels a day were making their way onto the world markets. Oil was falling to $20 a barrel according to Goldman Sachs, as I mentioned in last December’s Informing You.
Given this information what would you have expected to happen to the oil price? I bet you would not have thought it would have risen by 42% from $28 to $40 a barrel since then.
Reading specialist press is no help in trying to predict the future. Last June Money Week “Britain’s best-selling financial magazine” had a front page headline – “Buy China” and two months later “Hard Landing – don’t get crushed by China.” Now I know that it is difficult enough to come up with something worth saying every month, never mind weekly, but to have a volte-face in such a short time is bordering on schizophrenia.
Mind you given their September 25th issue headline suggested you should sell the US$ and since then it has increased by 9% over Sterling means that maybe the best way to make money by subscribing to this magazine is to do the exact opposite of what they suggest.
This brings me to the point of this missive. Last autumn I recommended a portfolio of funds to a new client. They knew quite a bit about investing so took an interest in my suggestions. Two of the funds I had recommended had been poor performers in the last twelve months and they indicated that they had reservations about these being included in the portfolio. They were, however, very happy with the others as they had all performed well in that period.
Thankfully they agreed to stick with my suggestion and since the investment commenced the two funds they had concerns about have been the best performers by some margin. Why? I would love to say I knew they would be the best performers in the short term but of course I didn’t. What I do know is that markets change and perform in cycles, and designing a portfolio is trying to ensure that you have a range of different funds that are managed in different ways. Simply investing in the fund(s) that have performed best in the last twelve months is almost guaranteed to lead to lesser returns in the long term.
This is why we believe that meeting managers, drilling down to see why they may have underperformed or outperformed in the last twelve months is key. It is also why we try and avoid knee-jerk reactions if a fund has a period of performing poorly.
As for the oil price, as anyone working in the industry will attest, companies have been pretty ruthless in cutting production. There are now only 480 drilling rigs in operation in the mainland US, the fewest since records began in 1948 even though the development of fracking has resulted in the US now having four times the amount of recoverable oil than Saudi Arabia. The other wells are all capped and will remain so until the oil price returns to a level that make drilling viable once more.
Given this and the fact that even the Saudi’s are starting to feel the pinch with oil at its current price, it may be that the movement in the oil price will continue to be on the upside. However if Money Week agree can I change my mind?