Free Commentary

By: Dan Hueber –

Just about one year ago now the crude oil market began to rise from the ashes in face of overwhelming bearish market sentiment and went on to lead the commodity sector higher throughout much of 2016.   As with any market move, the overall advance was marked by both higher and lower swings but the positive ones outstripped the negative and as would seem fitting for a year that began on such a dour note, the final swing higher came during the last 45 days of the year as OPEC tried to bear its teeth once again. In that final push we saw the price of crude lift to the highest levels dating back to the summer of 2015.  Since the calendar has rolled over into 2017 this market has been struggling just a bit as the world trade takes a wait and see attitude to determine if OPEC can actually remain unified enough to implement its new production agreement. Overnight energy markets did finally receive a little boost but it seems this was not from confirmation of a cutback in output but rather a report from the International Energy Agency that ever rising demand will have pushed usage above the cartel’s 32.5 million bpd output throughout 2017 and could even counter any increase in shale production in the United States.  Granted, the proof yet remains in the pudding but at a minimum, it would seem to suggest that the downside risk for crude in the months ahead should be limited.

Obviously this sentiment is also held by several oil companies as they have entered into agreements for a larger piece of the shale industry.  Exxon Mobil has committed to a deal to purchase the shale drilling rights on around 250,000 acres in the Permian Basin in Texas and New Mexico for around $6.6 billion and Noble Energy released plans for a deal to purchase another firm that holds rights to drilling on another 171,000 acres in that same region.  The value of that agreement was around $3.2 billion.  While no one makes the right investments all the time, you would have to assume that these companies well understand the long-term outlook for energies and regardless if OPEC can deliver on cutbacks for any length of time or not, rising world demand will keep crude and other energies in a generally positive pattern.

Make no mistake, the longer-term outlook for oil as well as other commodities that are emerging from supply gluts is not being missed by institutional investors either.  An article published yesterday in Bloomberg News it noted that it is estimated that there is around $115 billion now invested in the Bloomberg and S&P GSCI indexes which is just over double of where it stood a year ago.  If you are concerned about where the next dollar will come from note that at one time there was more than $300 billion invested in these indexes. Other indexes and funds have witnessed similar interest and it is estimated that just this  month, energy ETF’s have already attracted $390 million, industrial metal ETF’s around $40 million and ag funds $25 million.  As I noted concerning the investment by energy companies in the rights for new shale drilling, there is no one that makes the right decisions all the time but it would appear that institutional investors continue to look at the commodity sector as a place of value and growth.