PA ANALYSIS: Should investors worry about OPEC?

Added 30th September 2016

OPEC’s surprise deal to cut production agreed this week caught most investors off guard, but is it just another small bump in the road or a serious threat to portfolios?

“We went long US energy equities last month based on our commodity strategists' view that oil prices would average $61pb next year,” wrote the bank's research team. “OPEC's decision to cap output from November has given the oil price a boost and underpins the call for higher 2017 prices.”

Heartwood Investment Management investment manager Jade Fu noted that the next meeting of OPEC will be important.

“While the agreement is a positive signal for the energy sector as a whole, we think it is too early to tell what the actual impact will be on supply and demand, given no details have been announced yet,” she said. “Countries have to agree on how to implement the quota and by how much each individual country will cut their supply. This will be determined at the formal meeting in Vienna at the end of November.”

“Negotiations will be challenging,” Fu continued. ”The agreement excludes Iran, which is trying to increase market share having returned to the world oil market after years of economic sanctions. However, other countries are also trying to increase their market share, such as Iraq and Libya, which may lead to potential areas of contention. Oil prices should remain underpinned in the near term; the supply/demand outlook has seen steady improvements and this is likely to continue into 2017. At the same time, though, we are likely to see some volatility going into November’s meeting. We are not taking any investment action in portfolios as a result of OPEC’s decision. However, we continue to maintain reasonable exposure to energy through commodity-related sectors, such as US high yield and private equity.”

So, on balance it seems fair to say there is nothing to panic about at this stage, but if OPEC makes an aggressive move at its next meeting one or two alarm bells may go off. 

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Alex Sebastian

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Alex joined Portfolio Adviser in April 2014 and has been a financial journalist since 2008. He has previously held editorial positions at the Financial Times Group and Euromoney Institutional Investor. Alex is NCTJ qualified and has a degree in economics from the University of Sussex.

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