Alma Recurrent Global Natural Resources Fund

Market Review and Outlook

In a world with two geopolitical hot spots and stubbornly high oil prices, investors’ focus on OPEC has intensified. While markets have evolved, two longstanding narratives persist – that OPEC actions alone determine global oil prices, and that OPEC countries’ fiscal budgetary needs play a role determining global oil prices. In both cases, as the global oil market has matured, the value of these narratives has weakened. As the marginal oil producer, US Shale sets global prices, as outlined in our white paper titled “The Changing Shape of Energy Cycles.” History has shown that high oil prices, not low oil prices, have contributed to Middle Eastern civil disruptions and geopolitical conflict over the last 50 years.

Please reach out for our 2022 white paper on Shale’s increased strategic importance in a time of ESG

Performance Review

In the month of May, the Alma Recurrent Global Natural Resources Fund rose +3.88% net of fees. On a year-to-date basis, the Fund has risen +9.17%.

During the month, portfolio holdings Alcoa rose +26.27% and International Paper rose +30.40%, benefiting performance, while the Fund’s holdings in chemicals and oil transportation increased by less than the broader index.

Investment Discussion

OPEC policies and geopolitics remain weak explanatory variables for oil prices
Since the beginning of 4Q 2023, major global oil-producing regions have been engaged in two military conflicts: Russia-Ukraine and the Middle East. Historically, geopolitical conflicts have been identified as causing significant oil price spikes, regularly known as a “geopolitical premium”. However, apart from the price rise in the first six months of the conflict from January-June 2022, the oil price has remained in a consistent $70-90/bbl range, consistent with 2H 2021 pre-conflict levels. Furthermore, OPEC has taken steps to tighten the market with supply cuts during this time.

As a large block of global oil supply, managed as a cartel, OPEC has generally been identified as the cause for relative price “stability” in the face of geopolitical conflict. However, with heightened risk to global oil supplies, many would argue that oil prices should be even higher. Rather than reducing supply to increase prices, those would argue for higher supplies to offset heightened supply risk.

It is in this context that we revert to a foundational perspective we affectionately call the “dispatch curve”. Conceptually, the oil market “dispatch curve” ranks production on a cost-perbarrel basis, with Saudi Arabia/OPEC at the low end of the cost curve and US Shale at the high end. This framework would point to the increase of US Shale barrels to the degree that lower cost barrels are withheld from the market for non-economic/geopolitical reasons.

Recent Shale oil production data corroborates this view. Since the beginning of the Russia/Ukraine conflict in 1Q 2022, US Shale has “turned on” an additional 1.5 million barrels daily, and onshore production is at or near all-time highs. While OPEC has cut production nearly 6 MM barrels/day, those barrels have been partially offset by US shale oil production. Higher prices incentivize high-cost, short-cycle production to enter the market, limiting further price accelerating impacts that significant cuts and geopolitical disruptions would normally cause.

High oil prices have elicited themes from oil bulls which we hadn’t seen for some time…..the introduction of oil producing countries’ “fiscal cost-per-barrel” needed to balance their fiscal budgets. The logic behind the concept is sound – countries with economies focused on oil production want to keep the oil price high enough to balance the budget. Furthermore, commonly-held logic is that the budget includes significant subsidies to support underserved populations. Should the oil price fall too low, financial resources would erode causing civil unrest. As a proxy, the fiscal budget argument loosely underpins support for high oil prices.