NEW YORK Reuters - A surge in oil prices is drawing fund managers back into shares of oil and gas companies, even as some remain unsure that the price gains will stick.
The rally has caught many fund managers by surprise, and some are scrambling to catch up, betting that commodity prices will remain high in the face of burgeoning demand. Allocations to energy stocks among fund managers increased by 23 percentage points from last month to the largest overweight since March 2012, as a BofA Global Research Survey showed on Tuesday.
I have a sneaking suspicion that energy prices will be elevated for a while because it will take some time for supply side to catch up, said Jack Janasiewicz, a portfolio strategist at Natixis Investment Managers who has been increasing his overweight in energy stocks.
Janasiewicz also told the audience he believes surging prices for oil and gas companies will likely bring in money managers who have been underweight the sector and are nervous their comparative performance will suffer.
Many fund managers had spent years pruning their energy holdings, as clients demanded more exposure to environmentally friendly companies in their portfolios and an abundance of shale oil in the United States undercut the case for big rallies in prices. Energy stocks had an average of 2.6% of their portfolios in August, compared with 5% three years earlier, according to Morningstar data.
Supply bottlenecks and worker shortages that have helped push energy prices in Europe to record levels have helped change this calculus. Meanwhile, worries that a recent surge in inflation could be more persistent than anticipated have boosted the appeal of commodities as a hedge against rising consumer prices.
Brent crude futures topped $86 a barrel on Monday, their highest since October 18th. U.S West Texas Intermediate futures (USD) have hit $83.73, their highest since October 2014.
Energy companies have focused more on earning cash and profits to shareholders via dividends and buybacks than gaining market share, and have been slow to increase their rig count as spot prices increase, he said.
Lower rig counts help keep prices buoyant because they keep a lid on supply. While rigs operating in the United States have increased six weeks in a row, the total rig count is just now back to levels last seen in April 2020, according to Baker Hughes Co.
However, some on Wall Street remain wary that the rally in oil prices will reverse if inflation proves transitory, demand slackens or energy companies invest too heavily in production. Past boom and bust cycles in commodity prices have been marked by rapid surges in oil prices followed by bruising declines: Oil was of around $100 a barrel to around $30 between 2014 and 2016 as growth in shale drilling made the United States the world's largest producer of crude oil.
Simon Wong, an energy analyst at Gabelli Funds, said that some market participants may be wary of companies ramping up production and flooding the market with supply.
The general investors need to see two or three years of commitment from companies that they are not going to grow at all costs before they return en masse, he said.
Michael Underhill, chief investment officer at Capital Innovations, said high costs will drive some consumers to convert consumption into alternative energy sources or reduce usage, causing oil prices to fall as much as 20% in the next 12 months.
The old adage of the best remedy for high oil prices is high oil prices will prove to be correct again, Underhill said.