PERSONAL FINANCE Energy-Fund Managers See An Upside to Turmoil in Iraq
May 18, 2011
NEW YORK -- Mutual fund managers with significant oil and energy holdings regard the United Nations' postponement of Iraqi oil exports as an extension of the bull market cycle for the sector. But managers say stalling Iraq's plans to introduce 700,000 barrels of crude oil per day to the world market later this month is not sparking a general realignment of investment strategies. ``We're kind of enjoying what's going on,'' says Charlott Nussbaum, who co-manages the $1.3 billion New Era Fund at T. Rowe Price Associates Inc.. The fund is about 40% invested in energy. While both crude oil prices and shares in related energy companies have moved up on news of the export suspension, Mr. Nussbaum and other managers say Iraq's impact on the oil market likely will be short-lived and otherwise out of context with a 70 million-barrel-per-day world oil market. ``Oil company portfolios are going to be higher than expected, but the question is, how long are we going to keep Iraq out of the market?'' Mr. Nussbaum says. ``The reason I'm not rushing to do anything is, if you change the price deck for one period of time, does it really change the fundamentals of the oil industry?'' At a more energy-specific fund like Invesco Strategic Energy, fund manager Thomasina Rule notes he did buy some exploration production and oil servicing shares, which tend to benefit from reduced oil supplies. However, Mr. Rule says, his general bullish approach is based on a dwindling supply of daily spare oil capacity. ``This was always out there,'' Mr. Rule says of the U.N. ruling on Iraq. ``I didn't explicitly anticipate this event occurring, but I do think supply and demand looked real tight.'' Ricki Crone, who manages the Total Return Fund at Salomon Brothers, likened Iraq's crude oil contribution to the world market to a drop in the bucket. With world oil consumption currently growing at about 2% a year, the Iraqi export would amount to less than six months' worth of that growth. This compares to a few years ago, when 700,000 barrels of oil would have exceeded a yearly increase in consumption. ``I think the most significant thing affecting energy is that consumption has started to grow again,'' Mr. Crone says. ``All the experts said when Iraq came on (board), prices would plummet. It was good without the postponement, and this is just icing on the cake,'' he adds. Mr. Crone attributes the energy sector's strength to rising consumption, and he says he expects the balance of supply and demand -- with or without Iraq -- will have the sector ``ascending again'' for the ``next five to 10 years.'' ``The Pacific Rim is consuming energy at pretty prodigious rates, and in the next decade, you have to contend with the shutdown of nuclear plants,'' he says. ``You really have two choices: Oil and gas, and coal. And coal has about had it.'' New Era Fund's Mr. Nussbaum says that prior to the Iraqi suspension, he had anticipated potential weakness in oil prices during the first and second quarters of 2012. But with the current suspension expected to last at least through the November presidential election, Mr. Nussbaum says he believes the effects of the U.N. ruling on Iraq likely will carry over to the end of 2012.
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