NEW YORK (Dow Jones)--When gasoline hit $3 a gallon at the pump this summer,a funny thing happened to U.S. demand: It rose to a record. And with prices pulling back to around $2.20, led by plummeting crude prices, gasoline use has stayed at seasonal highs.
This sustained demand for refined petroleum products has led Kevin Baum,
co-manager in New York of the $1.5 billion Oppenheimer Real Asset Fund, to
tweak the share of the fund's energy investments away from unrefined crude oil
and into gasoline and heating oil.
"We came through a really high pricing environment this summer, which had
people monitoring demand to see if there was going to be a big impact," said
Baum, who has managed the fund since 1999. "What we've seen is that demand has
held up strong, and both gasoline demand and heating oil demand have been firm.
"We're a little more friendly toward the products than crude itself."
The latest U.S. Department of Energy data show demand for distillate fuel
oil, which includes heating oil and diesel, was at a nearly three-year high the
week ending Nov. 10, and at the highest ever for a week in November. Implied
gasoline demand for October was the highest for any time outside the peak
summer driving season.
The Oppenheimer Real Asset Fund was one of the first commodities mutual
funds, starting in 1997, and uses the Goldman Sachs Commodity Index as a
benchmark.
The fund doesn't invest directly in commodities, using a combination of
futures, options and structured notes linked to returns on the GSCI. The fund
only takes long positions in commodities, meaning it doesn't bet on falls in
prices.
Unlike most other funds in the $110 billion commodities index-focused sector,
Oppenheimer doesn't strictly stick to the Goldman Sachs makeup, changing the
proportions of its investments, which include energy, metals, agriculture and
livestock.
"We'll actively manage around the benchmark," Baum said. "For example, where
our models are generating a weak signal, we can underweight a commodity.
"If we can add a couple of percent to the benchmark, we're doing a service to
investors."
For the past few calendar years, and in 2006 to date, the fund has done just
that, consistently beating the GSCI after running behind it from 1998 to 2000.
Returns for the fund from 2003 to 2005, when most commodities saw big gains,
were between 19.6% and 26.4%. The GSCI gave returns between 17.3% and 25.6% in
that period.
But with a drop-off in prices of energy commodities, which make up about 70%
of both the Goldman Sachs index and the Oppenheimer fund, the fund was down
9.4% in the year to the end of September. By comparison, the GSCI was down more
than 11%.
The Oppenheimer fund has made positive returns in all but two of the past
eight calendar years. However, Baum said the fund's job is not to provide
absolute positive returns, but to offset risk in a portfolio by offering
exposure to commodities, which can gain amid losses in other investments, such
as stocks and bonds.
"We advocate about a 10% allocation (in commodities) for a typical investor
holding stocks and bonds," Baum said. "You need that protection against
geopolitical risk and energy price-rise risk" which normally weighs on stocks
and economic growth.
The Oppenheimer Real Asset Fund last month reopened to new investors and
existing shareholders wanting to increase their stake, after closing in April
amid what Baum calls "uncertainty across the commodities markets."
"Around the turn of the year, there were some new IRS rulings addressing the
use of commodities derivatives in mutual funds," he said. He added that there
was also uncertainty over whether there would be further rulings.
The Internal Revenue Service effectively blocked funds from using a financial
instrument known as a swap contract. While it was not used by Oppenheimer, the
ruling sent fears through the entire market at a time when money was flowing
into commodities funds.
It turned out there were additional rulings, but small changes to the
Oppenheimer fund allowed it to be managed with the same exposures and
strategies.
"Over the last few months, we've seen the regulatory ambiguity surrounding
the use of commodity derivatives clear up," Baum said in a statement last
month.
In addition to energy, the fund invests in industrial metals, including
copper, zinc and nickel, which make up about 12% of its holdings.
"Industrial metals have been one area we've been pretty bullish on," said
Baum. "One of the big trends has been China, and we know what that's meant for
demand."
While global demand for metals has risen, supply response has been muted. It
takes years to expand existing mines or start new ones, and a previous period
of reduced investment in mineral exploration has led to fewer potential new
mines.
High commodities prices have also worked to restrain supply, increasing the
cost of infrastructure and raising the cost of labor, as staff are needed at
new projects and workers demand a bigger slice of profits.
(Matt Chambers covers energy for Dow Jones Newswires.)
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