Experts from around the world give their best ideas for capitalizing on the changing landscape.
Marwan Younes, President and Chief Investment Officer, Massar Capital Management:
“Over 70% of the world’s oil production growth over the past decade was driven by U.S. shale, an industry highly dependent on low-interest rates. The shale phenomenon has helped sustain strong U.S. GDP rates, as it accounted for the bulk of the increase in domestic capital expenditure while simultaneously capping inflationary energy prices. The interplay between interest rates, inflation, and the central bank’s reaction function makes the monetary policy a far more important component of the energy sector than in the past.
From a speculator’s perspective, this landscape is unfolding just as risk capital is leaving the sector in droves. The majority of the large banks active in energy markets have either shut down or reduced their commodities divisions, because of regulatory concerns or a shift to more efficient uses of capital. Meanwhile, assets dedicated to energy hedge funds are a sliver of what they used to be. In our view, the lack of available risk capital has had two pronounced consequences:
One, an increase in the magnitude of price swings and a heightened market sensitivity to the higher frequency of event risks. As a result, investors should shorten the time frame of their outlooks and more actively manage their exposures instead of trying to capture longer-term thematic market moves.
Two, given the considerable producer hedging flows, taking the other side by warehousing risk and providing liquidity should be well compensated.”