Ever since crude oil prices bottomed early last year, the trend has been undeniably up, but clearly not up in a straight line. There have been several steep corrections along the way. Oil prices fell by over 10% from mid-December to late March and oil-related equities did even worse: a double-digit dip occurred as traders panicked over record high U.S. crude inventories. Nonetheless, each time crude has dipped more than 10% over the past year, it has proven to be a buying opportunity for oil stocks, and MRP believes the same will be true this time: Energy equities will turn out to be a top performing sector in 2017 with oilfield services leading the pack.
MRP first added the U.S. energy sector as a new theme with the publication of the April 2016 Viewpoint “Implications of the Coming Shortage of Oil”. We argued that the massive cutback in energy capital expenditures, combined with the shrinkage in energy workers, and drying up of financing options would lead to a shortage of oil. The report also opined that the freeze agreement that had been announced by some major OPEC members and Russia may have marked a turning point in the trajectory for crude prices. Altogether, these forces, MRP wrote, would boost prices to the $60-80 range.
Not long after our initial report, oil prices rallied to over $50 a barrel and sentiment turned much more positive by the late spring. But over the past several months, record high U.S. crude inventories have swung trader sentiment back the other way yet again. The conventional wisdom now seems to be that the global oil glut will persist indefinitely. Bearish observers reason that any increase in prices will bring on self-destructive increases in production. MRP’s view is now once again quite contrarian. The reduced level of production around the world, combined with stronger than expected demand will result in a second leg up for the oil price recovery . . .