Since the increase in intensity and scope of sanctions on Iran, the price of energy has re-emerged as a significant influence on our investment analysis, particularly in the short- and intermediate-term.
We capture important nonfundamental macro influences through the creation of macro themes that are designed to identify factors materially affecting assets and currencies around the world.
The objective of our energy theme is to assess the influence that energy prices have on markets and currencies in our investment universe.
This assessment involves a number of considerations. Some, such as fracking and the United States pulling out of the Iran Agreement, are more obvious. Others, such as transportation in the natural gas space, are less so.
Because natural gas is generally a local commodity that is increasingly becoming a global commodity, differentials in natural gas prices are dissipating.
What is interesting about our energy theme is that part of the analysis comes from our Middle East game theater, which focuses on the dynamics among Iran, Saudi Arabia, Russia, the United States, Turkey and Israel. (We describe how we use game theory and dimensions of net influence—endowment power, coalition power, risk tolerance, and salience—in another post.)
How do these dynamics affect our investment decisions?
Long-Term: Energy Attractive
From a long-term fundamental value perspective, the global energy sector is still very attractive despite outperforming broader equities a bit this year.
Comparing estimates for the intermediate-term price of oil (about three years out) to our longer-term estimates, prices are a bit above what we would establish as our equilibrium basis. Accordingly, we recently trimmed our energy sector exposure.