Shifting supply/demand dynamics could continue to impact energy prices

Oil prices (as represented by West Texas Intermediate, or WTI) have traded as low as $46.83 a barrel on Jan. 7, 2015, from a recent high of $107.73 a barrel on June 20, 2014. Such a drastic price adjustment of more than 50% in less than seven months is unusual even for a commodity. We believe the adjustment may be attributed to a fundamental shift in the supply-and-demand dynamics for oil along with a geographical redistribution between oil-exporting and oil-importing countries and regions.

World demand for oil dropped 10%, from 50.0 million barrels a day (last 12 months average) between 2005 and 2007, to 45.7 million barrels a day as of August 2014. Yet global oil production over the same time period increased 9.6%, from 83 million barrels a day to 91 million barrels a day (based on Organization for Economic Cooperation and Development (OECD) data obtained on Bloomberg). The geographic redistribution of supply-demand patterns for oil can easily be seen in the United States, Europe, and Japan. U.S. oil production, for example, increased more than 70% over the past few years, from 5 million barrels a day to more than 9 million barrels a day (U.S. Department of Energy).

Some oil analysts have indicated that a 0.25% supply-demand imbalance may result in short-term price volatility of 10%. Price adjustments further may be obscured by the cyclical fiscal stimulus measures and monetary easing policies enacted by governments and central banks around the world.

Moving forward, the rebalance in oil supply and demand may lead to further volatility in WTI prices. Other, external factors also could continue to affect oil price volatility. For example: disparities in global economic growth, fiscal and monetary policies, geopolitics, and distribution pipelines all have the potential to add to volatility within the energy markets. We will continue to closely monitor oil price adjustments, particularly as we anticipate the number of global rig operations to be cut before any major adjustment process has been completed.

The views expressed represent the Manager's assessment of the market environment as of January 2015, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager’s views.

All investing is subject to risk, including the possible loss of principal.

International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, and economic or political instability in other nations.

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