Why investors are turning away from oil

OPEC’s production cuts continue to exceed expectations, but that doesn’t tell the full story

Why investors are turning away from oil

As OPEC’s production cuts continue to exceed expectations, the organization is edging closer to achieving the ambitious goal it set last year. Unlike previous efforts to cut production, which have been hindered by cheating and non-compliance, OPEC’s members appear to be taking last the new accord seriously. According to a survey conducted by Reuters, OPEC delivered 82% of its promised cuts in January and, in February, production dropped to 32.17 million barrels a day; a 65,000 barrel-a-day drop from the previous month.

Oil is currently hovering around the $53 mark, something that Wayne Wachell, CEO of investment management firm Genus Capital, puts down to the current economic cycle as much as OPEC’s efforts. “We’re at the end of the cycle and typically at those times resources and industrials do well,” Wachell says. “Oil bounced last year and we think it can probably go into the $60s by the end of the cycle, but we don’t think we’re going back to the days of $100 oil. OPEC and the Saudis have shown a lot of discipline and we think that’s in line with their move to float 5% of Saudi Aramco.”

Despite the positive outlook for OPEC right now, Wachell believes that the United States’ focus on deregulation and energy independence combined with China exceeding expectations in renewables will put pressure on OPEC and high cost Canadian producers in the longer-term. “We think prices will be more downside than up,” Wachell says. “In fact, there has been a decent oil rally and oil stocks have really underperformed; they can tell something is up.”

Wachell has seen accelerated growth in the divestment movement (when organizations or institutions refuse to own companies involved in extracting fossil fuels) and recently Laval University became the first in Canada to fully divest, something Wachell believes heralds the second wave of divestment in Canada.

In response to the changing investor appetite, Genus has created a fund that has 50% of its portfolio invested in technology, clean tech and renewable energy companies. The fund is currently up around 7%.  “We’re about 70 basis points behind the benchmark which is not bad given that oil has had a nice bounce back,” Wachell says. “We’re benching off the MCSI World Index and have been hurt a little because the U.S. has outperformed Europe. We are overweight Europe because they have more clean tech names.”

The fund holds a lot of technology companies and Wachell points to Vestas Wind Systems in Europe as a name that has performed well. In the US, the fund owns companies like VMware and Citrix, which offers VPN services and web meeting solutions. “In Canada, we own Descartes, which does logistics for shipping companies, and renewable energy firm, Innergex,” Wachell says. “Those are some of the names we like here.”

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