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December 12, 2014

Net Outflows From Natural Resources Funds Tied to Drop in Oil Prices

by Pat Keon, CFA.

As oil prices have dropped over the last six months there has been a consistent steam of net outflows from mutual funds in Lipper’s Natural Resources (NR) Funds and Global Natural Resources (GNR) Funds classifications. Funds in these two categories invest in the equities of companies involved in oil exploration, production, and/or distribution. The U.S. and global benchmarks for oil (West Texas Intermediate Crude [WTI] and Brent Crude) have each lost approximately 43% since the end of June. WTI ($59.50/barrel) and Brent ($63.00/barrel) both hit lows this past week that they have not seen since July 2009.

Moving mostly in lock-step with this price trend has been the monthly net flows for NR and GNR mutual funds. After fairly robust net inflows for June (NR +$355 million, GNR +$37 million) each category has been hit with mostly monthly net outflows since then. NR funds have had net outflows in five of the past six months for total net outflows of $234 million. This has reduced their year-to-date net inflows to $987 million, which is significantly down from last year’s total net inflows of $6.1 billion. The data for GNR funds paints a similar picture; they have had net outflows for the last five months (for total net outflows of $1.3 billion since the end of July), pushing their year-to-date net outflows to $1.8 billion.

The flows for NR and GNR funds warrant continued observation. OPEC announced this past week that it believes the global demand for its oil in 2015 will drop to the lowest mark in more than a decade. If this forecast is accurate, the lower demand will create an even larger supply surplus and further negatively impact oil prices. If the current trend continues, we can expect additional net outflows for NR and GNR funds.



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