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PGAM Thoughts on OPEC

After lots of debate and conflicting headlines, OPEC officially reached an agreement to cut oil production in Vienna on Wednesday, November 30. We believe this is a significant event marking the first coordinated OPEC cut in eight years and it marks a strategic shift in the Saudi Arabia-led OPEC strategy of the last two years to pump oil to maintain global market share.

Following the OPEC announcement, our view remains constructive for a recovery in oil prices and outperformance of the energy sector. Several reasons why:

  • Our prior outlook for a balanced oil market in 2017 now shifts to an undersupplied market.  We believe North American producers will meet this supply shortfall.
  • Global oil inventories will decrease from current elevated levels if global economic growth and oil demand remains positive.  This historically has been an important indicator for a positive reversal in oil price cycles.
  • Higher commodity prices and leaner cost structures support better earnings growth for the energy sector and therefore global equity indices.

Due to the uncertainty ahead of the OPEC meeting, the outcome has driven many oil exposed Energy stocks to 52-week highs. However, media and investor skepticism is high that Saudi Arabi, Iraq, and Russia will cheat vs. committed cuts and concerns remain on global oil demand. We believe this skepticism is healthy, will lead to volatility and most importantly will create investment opportunities.

The PGAM Global Equity & Dividend Growth model portfolios are well positioned with an overweight in the Energy sector versus appropriate benchmarks established earlier this year. We continue to evaluate new opportunities to reflect our constructive view on oil prices and the Energy sector. Our focus is on companies that will benefit from an increase in North America onshore oil production.

Important Disclosures:
This report is for informational purposes only, and contains data based on information derived from sources Princeton Global Asset Management (PGAM) believed to be accurate. However, PGAM cannot assure the accuracy of the data.
Past performance is not a guarantee of future results. Portfolio holdings and characteristics are subject to change. The information in this report should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the securities transactions or holdings that may be cited were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities cited.

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