Theme 1 - Conviction 9 out of 10
Energy security: a structural shift, not a trade
Decades of underinvestment met a prolonged conflict in the Middle East. The result is an energy market we expect to stay tight for years, not weeks.
Energy is our highest conviction theme at 9 out of 10. The view is simple: the world has spent years underinvesting in oil and gas production, refining and fuel storage, and it has now discovered that energy security cannot be taken for granted.
The supply shock
The conflict's most immediate effect has been on refined fuel. Strikes on Gulf energy infrastructure have cut Middle Eastern refining capacity by 20%, and Russian refining output has fallen 30% following drone strikes. In Ethiopia, daily diesel supply has been cut from 9.2 million to 4.5 million litres. Demand has not fallen. Major refining hubs have restricted exports and many countries have moved to fuel conservation.
| Region | Key pressure |
|---|---|
| Europe and UK | Diesel deficit into winter |
| United States | Low distillate inventories |
| Australia | Limited strategic fuel reserves |
| Emerging markets | Rationing and shortages |
Governments are responding by prioritising domestic production, strategic reserves and supply chain resilience.
What it means for portfolios
- Energy is held as a strategic allocation, not a short-term position.
- Energy producers are generating strong cash flow, which supports dividends.
- Coal is benefiting as Asian economies turn back to it for reliable power, with China alone having 300GW of coal fired capacity permitted or under construction.
- Energy acts as a hedge. When oil rises, the costs of other miners rise with it, so energy holdings cushion the rest of the resources allocation.
The research behind our strategy has modelled a range of oil price scenarios for the energy holdings in client portfolios, and those holdings are positioned to benefit if prices stay elevated. I will talk you through any changes to your own holdings.
How is your portfolio positioned?
Merit clients can talk through these themes at their next review. Call 1300 827 439 or email jim@meritfp.com.au.
More from the September update
- Built for the world we are entering
- The biggest capex boom in history
- Where the earnings are
- Income in a higher-rate world
- Sophisticated investor status: what it opens up
This information is general advice only. It has been prepared without taking into account your objectives, financial situation or needs, so before acting on it you should consider whether it is appropriate for you and speak with your adviser. Past performance is not a reliable indicator of future performance. Forecasts are estimates by third parties and may not be achieved. Views are those of the Merit-Morgans Partnership Investment Committee and are current at the date of publication. Merit Financial Services Pty Ltd is a Corporate Authorised Representative (No. 416822) of Paragem Pty Ltd, AFSL 297276. Unit 41/280 New Line Road, Dural NSW 2158. Research, dealing and administration are provided by Morgans Financial Limited, ABN 49 010 669 726, AFSL 235410. Financial Services Guide.