Despite the recovery in oil prices in the second half of last year, energy was the weakest sector in 2017 after a strong run in 2016. The short-term pressures — a potential supply glut due to weaker seasonal demand, an excessive focus on US inventories, the lag between the announced OPEC cuts and the actual delivery of crude oil, hurricanes in the US that shut refining capacity, and the ramp-up of shale production in the US — were transitory. On the demand side, there was stronger growth last year. With improving global economic growth, we should see further upward revisions to demand.
In our experience, the most reliable way to make money in the resources sector is to invest counter-cyclically, buying when the commodity price is depressed and low prices are constraining future supply.
Stock picks should have greater leverage to the underlying commodity when it falls towards cash costs, and investing in less commodity price sensitive shares when the price rebounds.
Peter Wilmshurst is the portfolio manager of ASX listed Templeton Global Growth Fund (ASX: TGG) and an executive vice president in the Templeton Global Equity Group with research responsibility for banks in Europe, and Asian telecommunications...