Continued weakness in energy prices is expected for the second half of 2015, largely due to a supply and demand imbalance in the oil market.
After two quarters of relative stability, commodities have again entered a period of renewed volatility. Demand has further weakened on fears about the meltdown in the Chinese stock market. At the same time, energy supplies remain high.
When oil prices plummeted in the second half of 2014, producers in North America decided to reduce rig counts, with the expectation of lower output. Instead, the production declines never materialized because only marginal wells were scaled back, while production costs at operating rigs have continued to decline due to technology advances. Consequently, North American production merely plateaued at an elevated level while OPEC and other non-OPEC production continued to climb.
While energy consumption had been relatively stable in the developed world, supply has continued to expand.
In addition, some optimism around the recent Iran nuclear talks indicated the potential to lift that country’s oil export sanctions, creating the possibility of a new round of selling across the commodity complex.
A quick resolution to these issues is not expected and, in our view, an underweight position in commodities overall is warranted.
Read more about Putnam's current thinking in Capital Markets Outlook.
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Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
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