Emma Wall: Hello and welcome to the Morningstar series, 'Why Should I Invest with you?' I'm Emma Wall and here with me today is Michael Hulme, manager of the Carmignac Portfolio Commodities Fund.
Hello Michael.
Michael Hulme: Hi Emma.
Wall: So, commodities, we may as well start with the most pressing subject in the sector, the oil price, down from $110 per barrel in July to $56 I think we are about now. What's happened and what's going to happen?
Hulme: Well, I mean, that's the $64 million question. I think we've had a considerable period of volatility in oil prices recently and I think it's no surprise that that has followed a period of a number of years of stability. It's almost like a Minsky moment. Hyman Minsky probably should have won a Nobel Prize for his work.
This period of stability in a way has with a quite elevated oil price north of $100 has set the scene for quite considerable supply growth coming out of particularly North America and particularly within North America the shales, the U.S. shales, the Eagle Ford, the Bakken and to a lesser extent the Permian.
Now, that supply has been building up over that period of years and OPEC has really sort of struggled to cope with that incremental supply, cutting production here and there and they have been various capacity outages which have kept that stability, if you like, going for a little bit longer than most people would have predicted. Then in the summer of last year what we noticed was that that supply was beginning to have a more of a profound impact on markets. I think when we saw that sort of appear in the storage numbers, inventories started to build, the rapidity of growth in the Eagle Ford really started to have an impact on markets.
Then we saw a big spike in Libyan production and quite considerably tight markets elsewhere in OPEC in terms of higher levels of supply. Then we saw something give, and that's when we saw the oil price really collapse. And I guess the icing on the cake, if probably the wrong thing to call it, was obviously Saudi's decision not to cut production.
Unsurprisingly, really when you consider the Saudi's are in a sort of proxy conflict with Iran over Syria and Assad and obviously, it favours the U.S. position on Russia with regard to sanctions that the Saudis would refuse to cut given the Russians' involvement also in the Syrian conflict on the side of Assad. So, all of those things came together and we saw this collapse and I think we are now seeing this sort of washing out of the system.
We'll see a considerable period of volatility. We were hit the low 40s at one point or mid-40s. I think we are back at $60 now on Brent. We could see some downside or volatility in the near term as the storage levels continue to creep up, but I think longer term and the medium term we will see supply coming off. We've seen the rig count decreasing. We'll see the market tighten up and I think with the sort of 12 to 18-month view we can be fairly confident barring an economic catastrophe that we will see oil prices north of $75 again.
Wall: There's two sides to this story. There's sort of the consumer side which is saying, woo-hoo, oil prices are down. It's basically a tax cut for the consumer.
Hulme: It's great, yes.
Wall: But for those invested in the region it has been quite a shock, but you're confident then with that time scale sort of another 18 months down the line we will see a normalization of oil prices around $75?
Hulme: Yeah, I mean, I think we were quite fortunate in seeing some of these coming. We don't always get – predict macro themes correctly and of course, we are a sort of bottom-up approach at our fund. But I think once you see the situation stabilise, once you see supply begin to contract with the impact of less drilling and once you see declines kick in particularly in, say, Russia where there is obviously sanctions regime, it's hard to get new investment in and drill new wells, you will see oil prices stabilise higher.
Wall: Looking then at the other sort of popular commodity theme, it's gold. Investors love the gold story.
Hulme: Yes, the gold bucks.
Wall: For years it was the sort of safe haven for so many; you only needed to Google ‘gold investor’ and everybody was saying, pour your money into it, they can only go up. It's gone quiet over the last sort of 18 months. What can we expect from that commodity?
Hulme: Well, I think, Emma, it's a really good question. I think people are caught between fearing inflation, fearing that quantitative easing will wipe away the value of their savings, the fiat currencies that they own and therefore, gold is seen as a store of value in times of crisis and more recently prevailing concerns about deflation which perhaps have taken some of the shine off the yellow metal. I think investors are caught between those two sort of poles, if you like.
I think what does look interesting and encouraging for gold is that obviously we have another round of QE. We have some instability in Europe that tends to provide support for gold prices and indeed, we've seen historically where you see the yield curve becoming less steep in the U.S., you tend to see gold performing quite well as long-term inflation expectations change. So, I think we are reasonably constructive on gold. And indeed, we have been looking at repositioning ourselves for that.
You must remember as an equity investor we have to invest in gold miners rather than the commodity itself and generally speaking, they have been pretty good destroyers of value over the last 10 years. You have to be very careful, particularly investing in the producers of gold rather than the gold itself.
Wall: Michael, thank you very much.
Hulme: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
