With Eye On The Gap In Crude Price And Stocks, Opportunities In Big Oil Sensed By Investors in 2018

Oil company share prices would find a strong footing in 2018 but up to a point, feels confident investors.

There had been an unusual performance gap between the shares in top energy companies and the recovering prices of crude in the market where the companies lagged behind the market, even though there has been rise in share prices since mid-2017. The broader equity indexes have performed much better than most big oil stocks.

The sector is still facing headwinds of fears of fall of long term demand for oil by the advancement in electric vehicles and uncertainty of whether the present crude rally would be sustained

But according to investors and a string of global banks, a turning point in global crude market can be marked by generation of cash by energy companies after three consecutive years of severe investment cuts and a consequent recovery in energy companies’ profits, in 2018- in stark contrast to the slump of 2014-15.

“2017 was a challenging year for investors but there are now real opportunities in the energy sector,” said Olivia Markham, portfolio manager at BlackRock Commodities Income Investment Trust. She added that a dip in recent year sin investment could see a tightening of supplies leading to a gradual rise in oil prices by 2020.

Starting third quarter of 2018, there could be a growth of 20 percent in the European integrated oil stocks, estimated Barclays analysts on Thursday while in recent weeks, strong positive outlooks for the global oil sector have been issued by UBS, RBC and JP Morgan.

Recently, raising of cash flow outlook from $25 billion by 2020 to $30 billion was made by Shell and that is pointed out as a positive development by optimists. The estimation was based on a crude price of $60 a barrel.

“Annus Mirabilis. Highest free cashflow in a decade bodes well for 2018,” Bernstein said in its outlook for European oil majors.

While there is typically a direct correlation between the crude that Oil majors extract and their shares, last year that trend was not adhered to. Following the output cut announcement by OPEC and other major producers since June, an increase of 20 percent was noted in the MSCI index but a 50 percent rise was noted in Brent LCOc1 to reach $68 a barrel.

The majors are intent on maintaining the cap on capital expenditure imposed during the slump years and this trend is expected to impact the spending on oil and gas exploration. This would be the fifth consecutive year for such companies to do so.

There is skepticism on the ability of crude to remain at the current levels even as there is an expected sharp increase in U.S. shale production.

“There’s little conviction on the oil price sustainability both from the market and from the oil majors because no one is touching capex plans or investment. Everyone is waiting to understand what’s going on,” said Angelo Meda, head of equities at Italian fund manager Banor SIM.

“From here it’s a question of whether or not investors think something has really changed in the industry, that you can still have earnings improving even if the macro doesn’t help you out,” said Peter Hackworth, oil equity analyst at Goldman Sachs.

(Adapted from Reuters.com)

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Categories: Economy & Finance, Strategy, Sustainability, Uncategorized

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