JP Morgan excited over oil and gas prospects

Lisa Smith, BA (Hons), CeFA

Short term market volatility has done little to change the view that oil and gas are compelling investments for the next decade and beyond.

Fund managers argue that focusing on day to day economic problems can affect the price of commodities, but does little to change the bigger picture.

That argument prompted JP Morgan Asset management to analyse the investment outlook for oil and gas commodities.

The research threw up three key considerations;

  • New frontiers are energising the oil and gas sector by unlocking new rich oil basins, that have not only triggered a short term oil price rise, but a realisation that the medium term assumptions for the oil price have changed. JP Morgan found that although oil prices had increased by 9% this year, Africa Petroleum – Liberia offshore returned 252% growth and Ophir Energy – East Africa Gas 95%.
  • Supply side issues will undermine other mining commodities – especially copper. The recent Center for Copper and Mining Studies (CESCO) conference in Santiago, Chile, reinforced the JP Morgan view that major producers face challenges which will impact 2012 supply. While oil and gas finds supplement stock, copper is facing declining ore grades, a shortage of skilled labour, environmental approval delays, longer lead times on obtaining equipment as well as a number of technical operating challenges.
  • Oil and gas valuations are under rated, says JP Morgan, and offer an attractive point of entry for investors.

Neil Gregson, lead manager of JPM Global Natural Resources Fund and JPM Natural Resources Fund, said: “While it is impossible to know when the current sentiment to commodity sector fundamentals will reverse, the long term structural case for an investment in commodities remains compelling.

“Investors should look beyond current short term concerns, such as the European debt crisis, and focus on the medium term outlook for investments – especially as we are seeing impressive individual stock performances in the oil and gas sector.

“The next 10 years will see more of the same – emerging markets led commodity demand growth as well as ongoing supply issues in the sector – but we believe the natural resources sector continues to offer one of the most exciting investment cases available.”

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