MIDDLE EAST SENSITIVITY
SHAWN REYNOLDS, CO-PORTFOLIO MANAGER: I think, to put it all in context, you have to remember that there has been geopolitical risk in the oil industry, for the last 40 years. You go back to the very first Arab embargo in the early 1970s. There has always been a geopolitical risk premium built into the oil price. Is there some today? Absolutely, but again, it has always been there. It depends on the magnitude of how big it is. I would say that today it does not feel any more significant than it has been in other times in the recent past. Is it $10, is it $15? But it is not anything more significant than that and it is really probably not going to go away. Certainly, everything that we've seen in the Middle East heightens it a little bit, making you a little bit more sensitive and that might be fairly supportive in the short-term. But over the long-term, what we have seen in the oil price is supply and demand fundamentals are very, very supportive. That is what has been driving this oil price strength if you go back over the last ten years.
GLOBAL OIL DEMAND
I think it is important to point out that global demand growth is weakening, not global demand. It is not falling off. Now, if you concentrate just on the OECD and the western developed nations, then yes, demand is falling. But when you layer in the non-OECD and the emerging markets, overall, we are still very close to all-time record high consumption. Certainly when we look into 2013 even with a marginal outlook in terms of GDP growth for the globe, you are most likely going to see an increase in consumption and probably all-time record high demand for crude on a global basis. For quite some time now, we have had a price range, as we've often said, somewhere between $90 and $105 for WTI. We continue to think that is a nice, tight range for us to stick in. Are we going to go above it, below it? For periodic times, we do. But I think, longer-term, we are still sticking with $90 to $105.
I think some of the key energy themes that we have been excited about for some time are still in place. There are three right now. The unconventional story – shale gas, shale oil in the United States – there is still a lot of value there, a lot of opportunity. And we think it is very compelling on a very selective basis. On that front, there are some names that have been in the portfolio for quite some time, like Pioneer, which is $105 stock. We think there is a lot more to go on that stock. Unconventional shale gas is less interesting, but we do think that we are getting very close to a bottom in natural gas prices. When we see us bottoming there, we might be rotating back into some shale gas themes that we have had success on historically. Mid-continent refining has been a theme that we have been pursuing for well over a year, and we continue to think that it is a real area of interest. They have been very good performers for us this year, and even last year, and we do not see that changing at all. And then finally, with oil prices kind of being fairly resilient in the $90 to $105 range, we really see the resurgence of international exploration pretty much across the globe. A lot of opportunities are popping up. And again, that is a theme that we have been in for some time, but we are actually starting to see a lot of interest outside of kind of a small group of investors. That is starting to get much broader, and that is obviously good for stock prices.
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