Trading Lanes

August 2016

102 years after opening, the Panama Canal has recently undergone considerable change.  It has been upgraded and expanded in order to increase traffic by over 50%.  Up until now, American importers and exporters have transported goods overland across the US or through the Suez Canal; expensive and time consuming options respectively. The Panama Canal now gives importers and exporters a viable alternative.  Good news for the shale industry too; the bigger ships the Panama can now accommodate will enable the export of shale gas to Asia.

In August 2014, oil was trading at over $100 per barrel and investors debated the burgeoning arrival of US energy independence thanks to the shale revolution.  Two years later, oil is struggling to reach $50 per barrel as the traditional crude oil producers flood the market in an attempt to retain their dominance.  They are using oversupply and subsequent price reduction to try to make the global switch to shale less economical.

The defensive positioning of our portfolios reflects the current low-growth, low-inflation environment of which the low oil price is symptomatic.  The low oil price has delayed the switch to shale, but the recent buildout in infrastructure - not just the shipping lanes but also pipeline projects - makes shale a viable challenger to the traditional oil producers.  These oil producers are competing away their returns, meaning that even though the oil price is likely to rise in the next few years, it is unlikely to approach its previous highs.