Cavanal Hill World Energy Fund Quarterly Commentary
Market overview
Oil prices, as measured by Brent crude, finished the quarter about where they began the period, despite volatility fueled by geopolitical uncertainty. OPEC+ (Organization of Petroleum Exporting Countries Plus) is planning to add oil to the market after having 2 million barrels a day in output cuts on the sidelines for sometime. Roughly 135,000 barrels a day will be added in April, with a 411,000 daily release planned for May. With several million barrels per day of spare capacity, and a new U.S. president committed to “drill baby, drill,” we were not surprised to see a break to the downside of the prior $70-$90 range for oil in April.
Natural gas prices rose about 13% during the quarter. Liquefied natural gas (LNG) facilities under construction are starting to come online, and demand being pulled to Europe is helping to support prices. A colder than usual winter in both Europe and the U.S. helped lead to lower inventories by quarter end. We still view LNG as a catalyst to drive natural gas prices above $4 per MMBtu, but that may be more likely to occur late in 2025 or in 2026. It is possible that natural gas demand — and prices — could also rise as an indirect result of trade war negotiations.
With electricity demand flat for the past 15 years, the only real change in electricity generation has been a shift from coal to natural gas as well as wind and solar. We anticipate an inflection in demand driven by artificial intelligence, which we believe could last years. We’re investing in electric grid supply companies as well as nuclear technology as we believe it will be needed to meet the demand for clean and stable power.
How are you positioning the Fund?
In anticipation of a significant increase in supply and lower oil prices, we reduced our exposure to oil-focused equities during the quarter. Among fossil fuel companies, we continue to see the greatest opportunity in both exploration and production (E&P) and midstream companies focused primarily on natural gas. LNG is coming into focus and we see
Europe as a likely customer for U.S. natural gas. We see demand from data centers and LNG increasing significantly over the next three to five years. We are still increasing our exposure to natural gas, including pipelines and E&Ps. We also see an incremental 10-15bcf/day of U.S. exports over the next three years, a significant increase relative to our U.S. market of about 105bcf/day.
We remained focused on growing global demand for electricity as a result of artificial intelligence (AI), electric vehicles (EVs), and cryptocurrency. We maintain a significant position in companies that provide electrical production and grid-related equipment. Nuclear power is a potential beneficiary of increased demand for clean electricity. We own shares in uranium production companies and in those that manufacture nuclear reactors for small applications. We continue to look for opportunities in solar and wind energy.
During the quarter, we took some profits off the table in nuclear, although we will continue to look for opportunities in the space should valuations improve. We continue to hold electricity stocks, which have been volatile since the DeepSeek January announcement that indicated China could be highly competitive on AI, but we still see plenty of demand.
Why should investors consider investing in this fund?
Access to cheap energy remains the lifeblood of economic development for emerging markets as well as developed nations, which are grappling with the increased power demand from EVs and AI while investing in technologies to reduce greenhouse gas emissions.
We expect oil markets to remain fairly balanced as OPEC+ seeks to manage available oil supply to keep the market tight in the face of uncertain demand. Over time, we believe U.S. natural gas presents a growing global opportunity. We believe demand for electricity is awakening from its decade-long slumber as crypto, EVs , and AI drive incremental demand, requiring further investment. We believe this trend benefits our fund as we invest in both fossil fuel and alternative technologies.
Disclosures
An investor should consider a fund’s investment objectives, risks and charges and expenses carefully before investing or sending money This and other important information about an investment company can be found in the fund’s prospectus. To obtain a Cavanal Hill Funds prospectus or summary prospectus, please call 800-762-7085 or visit us at www.cavanalhillfunds.com. Please read it carefully before investing.
Cavanal Hill Investment Management, Inc. is an SEC registered investment adviser and a wholly-owned subsidiary of BOK Financial Corporation, a financial holding company (“BOKF”). BOKF, NA serves as the custodian for the Cavanal Hill Funds. Cavanal Hill Investment Management, Inc. provides investment advice, administration and other services for the Funds and receives a fee for providing such services as fully described in the prospectus. The Funds are distributed by Cavanal Hill Distributors, Inc. a registered Broker/Dealer, member FINRA and wholly-owned subsidiary of BOKF.
Commentary provided is for the indicated period and is designed to provide a frame of reference. It does not constitute investment advice. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. The opinions expressed herein reflect the judgment of the authors at this date and are subject to change without notice and are not a complete analysis of any sector, industry or security. This document contains forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the Cavanal Hill Funds, the securities and credit markets and the economy in general. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “plans,” “projects,” variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the value and potential future value or performance of any security, group of securities, type of security or market segment involve judgments as to expected events are inherently forward-looking statements. Management judgments relating to and discussion of the value and potential future value or performance of any security, group of securities, type of security, or market segment involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expressed, implied, or forecasted in such forward-looking statements. The potential realization of these forward-looking statements is subject to a number of limitations and risks, which are described in the Fund’s prospectuses, and investors or potential investors, are cautioned to review the Funds’ prospectuses and the description of such risks. Neither the Funds nor the Funds’ investment adviser, Cavanal Hill, undertake any obligation to update, amend, or clarify forward-looking statement, whether as a result of new information, future events or otherwise.
Investment Risks
Equity securities (stocks) are more volatile and carry more risk than other forms of investments, including investments in below investment-grade fixed income securities. Fixed income securities are subject to interest rate risks. The principal value of a bond falls when interest rates rise and rise when interest rates fall. The Fund invests in foreign and emerging market securities, which involves certain risks such as currency volatility, political and social instability, and reduced market liquidity. Mid- and small-cap companies may be more vulnerable to adverse business or economic developments. During periods of rising interest rates, the value of a bond investment is at greater risk than during periods of stable or falling rates. International investing involves increased risk and volatility. The Fund’s concentration in energy-related industry securities may present more risks than would be the case with funds that diversify investments in numerous industries and sectors of the economy. A downturn in the energy sectors would have a larger impact on the Fund than on a fund that does not concentrate in these industries. Energy sector securities can be significantly affected by events related to political developments, energy conservation, commodity prices, and tax and government regulations. The performance of securities in the Fund may, at times, lag the performance of companies in other sectors or the broader market as a whole. Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries. The Fund may engage in active and frequent trading. Diversification does not assure a profit nor protect against loss.
If you’d like additional information about this or any of the Cavanal Hill Funds, please contact Bill King at 855.359.1898, Bill.King@cavanalhill.com, or cavanalhillfunds.com.
Not FDIC Insured | May Lose Value | No Bank Guarantee