A recent drop in energy-related assets appears overdone given our outlook for oil prices, creating opportunities in selected energy equities and credit. Richard explains, with the help of this week’s chart.
A recent drop in energy-related assets looks to be overdone. We believe this creates opportunities in selected energy equities and credit—even as we see oil prices trading mostly sideways in the near term. This week’s chart helps explain why.
Oil prices fell this month after trading in a tight range in early 2017. Concerns about industry oversupply led to the unwinding of record levels of speculative bets that crude prices would rise further. Energy stocks, however, appear to be pricing in too much pessimism. See the recently increasing performance gap between oil and global energy stocks above.
In a range-bound world
Demand and supply conditions supported oil prices earlier this year. Speculative trades in futures markets also contributed to crude’s rise on expectations the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC countries would implement agreed-upon production cuts. Nervousness about record levels of such positions, rising U.S. supply and growing doubts about production-cut compliance sparked oil’s recent price drop. Further unwinding could pressure prices further in the short term.
Oil prices are hard to predict, as production cuts hinge on an uncertain political environment. We see oil trading mostly sideways over the next three months. OPEC members have shown discipline in cutting oil production, and U.S. inventory growth should soon stabilize as oil refiners increase purchases. Global demand is also likely to rise amid reflation.
Energy stocks appear to reflect a more bearish price outlook. This creates opportunities. We like U.S. shale companies, amid cost cuts, improving technologies and the prospects of looser regulation. We also see value in the diversification offered by integrated-energy firms, including relatively cheap European oil majors. High yield energy bonds offer slightly better value after a recent selloff. We prefer credits of exploration companies due to attractive yields and balance sheet discipline. Read more market insights in my Weekly Commentary.
Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.
Investing involves risks, including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets, in concentrations of single countries or smaller capital markets.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of March 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.
©2017 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.