When U.S. President Donald Trump recently announced that the U. S. was withdrawing from the Iranian nuclear accord, oil prices barely responded. That just shows how difficult it is to get ahead of conventional wisdom.

Immediately following the withdrawal announcement, the spot price of crude oil rose by only 2 percentage points—essentially receiving no real response from the marketplace. Despite the additional macro uncertainty this announcement creates, conventional wisdom seems to have already had this event almost fully priced in.

What Are the Implications?

That said, the U. S. bowing out of the nuclear deal with Iran will have some short-term and longer-term impacts.

For investors, the forward price of oil is more important than the spot price in determining the fundamental attractiveness of the energy sector.

First, it creates a bit of an uncertainty premium in short-term oil prices, but I don’t expect much of an impact on longer-term prices.

Second, it creates some shifts in coalition powers as viewed from a game-theoretical perspective; namely it increases strains between the United States and Europe and creates more alignment between the United States and Saudi Arabia.

Short- vs. Long-Term Oil Prices

While most investors hone in on the spot price of oil, looking out on the forward curve provides an interesting investment perspective. The short-term spot price of oil was a little above $70 after the U.S. announcement—it has increased significantly, especially since mid-summer 2017.

But the price of oil for delivery three years out on the curve has traded in a tight range of $52 to $54 over that same time span. The small bump after Trump’s announcement is just noise.

This is important to us as investors because the forward price of oil is more important than the spot price in determining the fundamental attractiveness of the energy sector. That is because it determines cash flows that can be generated by the assets in the sector.

We still believe that oil’s equilibrium price range is $45 to $50 a barrel. We are not far from that range (looking out on the curve) and we do not expect the current spot price to remain this high for too long.

Some investors fear that oil prices could again become a proxy for the market as they did in the summer of 2015. We don’t see any signs of that, nor do we think it will happen. In August 2015, it was an uncertainty about global growth, precipitated by a focus on China that prompted the alignment between crude oil and the market.

I don’t think this current environment will mushroom into the same type of issue that we saw back then. That said, we remain cognizant of managing our energy exposure.

Trump’s Shot Across the Bow of North Korea

Regarding the realignment of coalition powers around the world, we don’t currently expect these shifts to have significant long-term investment implications. Still, we are going to re-examine our Middle East game theater to reflect the closer U.S. and Saudi alignment.

And the increased strains between the U. S. and Europe may impact trade and potential engagement with Russia in game theaters around the world.

At the same time, the U.S. nuclear deal withdrawal with Iran also is a bit of shot across the bow of North Korea coming into negotiations with Trump. It demonstrates to North Korea the hardline stance that Trump is willing to take.

Brian Singer, CFA, partner, is a portfolio manager on and head of William Blair’s Dynamic Allocation Strategies team.

RELATED POSTS

SUBSCRIBE NOW

Gain insights on macro market events, the economy, and investing strategies.
Receive our latest blog posts in your Inbox with headlines like:

SIGN UP

FOLLOW US

twitterfooterlinkedinfooteryoutubefooterfacebookfooter

RSS FEED

Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

The William Blair Funds are available to U.S. residents only. Non-U.S. residents, please click here.

Copyright © 2019 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

Statement of Financial Condition | NMS Rule 605 & 606 | Business Continuity Plan | UK Stewardship Code
Cookie Policy | Social Media Disclaimer | Privacy & Security | FINRA’s BrokerCheck

FOLLOW US

twitterfooterlinkedinfooteryoutubefooterfacebookfooter

RSS FEED

Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

The William Blair Funds are available to U.S. residents only. Non-U.S. residents, please click here.

Copyright © 2019 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

Statement of Financial Condition | NMS Rule 605 & 606 | Business Continuity Plan | UK Stewardship Code
Cookie Policy | Social Media Disclaimer | Privacy & Security | FINRA’s BrokerCheck

Subscribe Now

Gain insights on macro market events, the economy, and investing strategies. Receive our latest blog posts in your Inbox with headlines like:

SIGN UP

Send this to friend