Natural Resources Newsletter Q1 2019

Quarterly Review Q1 2019




Exploration and production stocks (as measured by the XLE Index) rose 16.8% in the March quarter surpassing a 14.4% increase in the S&P 500 Composite Index. The outperformance comes after a 33% increase in WTI spot oil prices during the quarter. The rise from $45 per barrel to over $60 per barrel came in response to violence in Libya and renewed hope for trade war détente. At current prices, well economics have turned more favorable and we would expect energy companies to begin increasing capital expenditures and the pace of drilling. We have long spoke of an oil trading range of $45- $70 per barrel and believe the market will correct itself as we approach the upper end of this range.

Meanwhile, company profitability is improving. Look for energy companies to take advantage of higher prices to add to hedge positions. While the oil price increase may be too late to help March-quarter earnings, the outlook for 2019 results and beyond has definitely improved. We favor energy companies with a large portfolio of drilling prospects and a strong balance sheet to fund future drilling. We believe energy companies will begin to consider share repurchases later in the year if energy prices remain strong and stock prices have not responded.


Mining companies (as measured by the XME) increased 13.2% during the March quarter versus a 13.1% increase in the S&P 500 index. While the broader index gained each quarter, the XME rose 17.3% during the month of January before giving up some of its gain in March. Gold experienced a 3% increase in price in January but finished the quarter up only 0.8%, while the price of silver declined 2.2%.

Softness in March may be attributed to dollar strength and optimism regarding resolution of trade and tariff issues with China. As concerns about a trade war with China ease, greater confidence in global markets has lifted the broader market and dimmed demand for gold as a safe-haven for investment. However, trade setbacks, poorer than expected economic numbers and greater market volatility could turn the tide back into gold’s favor. At this stage, we don’t expect a significant rally in gold until investment demand returns in a meaningful way.

Conversely to its impact on gold prices, we think growing optimism around trade with China has had a positive impact on certain base metals, including copper and zinc. During the first quarter, the price of copper rose 11.8%, zinc increased 17%, while the price of lead was flat. We are optimistic regarding demand growth for copper, which could benefit from greater use of electric-powered products, including electric vehicles, communication devices and charging stations.

The current sentiment in the market right now seems to be near-term positive but long-term wary. Therefore, investors should consider exposure to mining stocks in a diversified portfolio. A mix of base and precious metals equities could enhance a portfolio’s risk-adjusted return in good times and bad.