Lipper Natural Resource Funds Reports Third Largest Outflow on Record

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Lipper Natural Resource Funds suffered outflows of $1.3 billion in the past week, marking its third-largest weekly outflow on record. Last week, funds within the classification recorded an average loss of 10.64%. Lipper Natural Resources Funds completed two of the their 10 lowest weekly performances of all time in consecutive weeks.

Lipper Natural Resources Funds Weekly Feeds

The only other two weeks that showed larger outflows were the inflow weeks ending October 1, 2014 (-$2.5 billion) and January 16, 2019 (-$1.4 billion). These two weeks were followed by significant declines in gasoline and oil prices.

WTI Crude Oil Price vs. Gas Price

Today we are seeing massive spikes in all energy prices, which is helping energy companies’ cash flow. So why the outings?

The key factors are future earnings and expected headwinds from massive interest rate hikes. This week, the increasingly belligerent tone of Federal Reserve Chairman Jerome Powell caused market participants to factor in a further 50-75 basis point (bp) cut at the July meeting of the Fed. His comments sent investors fleeing to the safety of Treasuries, as the yield on 10-year Treasuries fell to 3.04%. Powell made it clear that fighting inflation would come before averting a recession, saying:

We do not seek to provoke and do not believe we need to provoke a recession, but we believe that it is absolutely essential (to reduce inflationary pressures).

It looks increasingly likely that the United States will not achieve the “soft landing” that Powell hoped for in March.

As interest rates continue to rise at historic rates, energy companies’ future projects are becoming more expensive; and as a recession becomes more likely, forecasts for energy demand will decline, which will eventually drive prices down. Consumer pain at the pump is so great that President Biden is considering a short-term solution of suspending the unprecedented federal gas tax, suspending 18.4 cents per gallon.

What also makes the outlook for energy companies even bleaker is that this energy crisis is not limited to the United States. Germany has announced that it will signal the “alert phase” of its emergency gas plan, as it also foresees a growing risk of running out of gas supplies eventually. Over the past week, Russia has reduced the capacity of the Nord Stream gas pipeline to Germany by 60%.

Another factor that adds to the price increase is the strength of the US dollar. Since most commodities are denominated in dollars, a stronger dollar means that buying oil in the United States with other currencies becomes more expensive.

U.S. dollar nominal broad index

So while high prices in the near term could be good for energy companies’ bottom lines, longer-term forecasts that include a recession and lower consumer demand are dire.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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