When Andrew Lees isn't busy managing the Invesco Energy Fund, he can often be found tooling around in one of his three shiny, gas-guzzling muscle cars.
"I own two Mustangs and a Shelby Cobra, which probably average about 8 miles per gallon," says the 41-year-old Lees, who has managed the fund since 2008. "I love gasoline and I love driving. And it wouldn't be fitting for an energy fund manager to be driving around in a Prius."
This year's spike in oil prices following political unrest in the Middle East and North Africa has made it a bit more expensive to operate those vehicles than it was last year. That's just fine with Lees, who says he has plenty of room in his budget for the increase.
Many Americans, however, would probably welcome a respite from higher oil prices. That could happen if things play out as they did in 2008, when the price of oil plunged from $147 to $32 a barrel between June and December as the world sank into recession and demand plunged.
Lees says that with an economic recovery under way, a similar scenario this time around appears unlikely. Demand has firmed up considerably.
"Back then, when gas went over $4 a gallon, the reaction was to move closer to work and sell your truck," he says. "By now, people have already made those kinds of systematic changes to their lives. And they've realized they can't cram their families into a Prius." China and other emerging market countries, which account for some 60% of projected growth in demand this year, will also help stabilize prices over the long term.
For shareholders, pain at the pump has also meant better returns than the market averages recently. In the first two months of the year alone, the fund was up nearly 13%, compared to a 6% increase for the Standard & Poor's 500 index. Lees believes that certain sectors of the energy market are well-positioned to reap the rewards of higher prices, and that there is "room for 20% to 40% upside over the next 12-to-24-month period in some of our favorite names."
Short-term pullbacks in the price of oil and stock market stumbles could make the road to such returns bumpy, of course. But while oil prices may make headline news, Lees believes the fund should be viewed as a long-term bet on constrained supply and increased demand, as well as an effective portfolio diversifier.
"Long-term fundamentals remain compelling," he says. "Supplies lost from depletion must be replaced before new demand can be met. And as commodity prices declined, many major projects were put on hold, putting a further burden on future supply."
For now, though, consumers and investors are keeping their eyes trained on protests in the Middle East. Global markets largely yawned at the events in Yemen and Egypt earlier this year. But after the unrest in Libya in late February, the threat of contagion and supply disruptions became more real. ICE Brent Crude, considered by many as the best barometer of the global oil market, hit a high of $120 a barrel before easing back when Saudi Arabia increased its output. Following the spike, a number of analysts raised their oil price forecasts for the second quarter of 2011, with many projections coming in at over $100 a barrel.
While some observers see recent volatility as the product of short-term commodity speculators, Lees views it as a rational reaction to disruptive events in Libya, where oil production was slashed. "The oil price reaction to the unrest in the Middle East-North Africa region reinforces our thesis that global oil markets are actually tighter than conventional wisdom suggests," he says.