Note from UBS on July 23
Posted: Thu Jul 23, 2015 2:32 pm
Non-OPEC supply to rebalance the oil market
The oil market has yet to rebalance, so the road toward higher prices
will stay bumpy in 2H15. The large 1H15 surplus of 2mbpd and
the potential return of Iranian supply raise further concerns. Prices
will remain vulnerable to setbacks toward the lower bounds of our
trading ranges for Brent at USD 50/bbl and WTI at USD 45/bbl. Our
unchanged guidance is that direct investments in crude oil remain
unattractive. However, once prices are trading at or below our
short-term trading ranges, we do believe investors should consider
going long the commodity. We keep our assessment unchanged
that oil market fundamentals will improve steadily over the coming
quarters driven by decelerating non-OPEC supply growth following
aggressive capex cuts and strong oil demand.
Even current crude oil prices are not sustainable, and ongoing
supply adjustments in non-OPEC countries will gain strength over
the next six months. As the market rebalances, once excess supply
is worked off, the new price equilibrium is expected to be higher –
at USD 67–72/bbl. A price move to USD 45-50/bbl would accelerate
this rebalancing process, suggesting that prices will not stay long at
these low levels.
Advising against direct crude oil exposure at current levels also
relates to investors' roll yield costs. Investors already lost 10% of
performance due to the upward sloped forward curve year-to-date.
We believe this raises the importance of timing when investing in
crude oil directly.
Energy equities are an alternative to direct crude oil investments.
They offer investors dividend returns versus roll yield losses, and are
driven more by broader price trends rather than short-term fluctuations.
Energy equities are also a "value play," following significant
underperformance on the back of collapsing oil prices. Consensus
earnings estimates for 2015 have been cut significantly, leaving
room for positive surprises driven by aggressive cuts in capital and
operating expenses.
The oil market has yet to rebalance, so the road toward higher prices
will stay bumpy in 2H15. The large 1H15 surplus of 2mbpd and
the potential return of Iranian supply raise further concerns. Prices
will remain vulnerable to setbacks toward the lower bounds of our
trading ranges for Brent at USD 50/bbl and WTI at USD 45/bbl. Our
unchanged guidance is that direct investments in crude oil remain
unattractive. However, once prices are trading at or below our
short-term trading ranges, we do believe investors should consider
going long the commodity. We keep our assessment unchanged
that oil market fundamentals will improve steadily over the coming
quarters driven by decelerating non-OPEC supply growth following
aggressive capex cuts and strong oil demand.
Even current crude oil prices are not sustainable, and ongoing
supply adjustments in non-OPEC countries will gain strength over
the next six months. As the market rebalances, once excess supply
is worked off, the new price equilibrium is expected to be higher –
at USD 67–72/bbl. A price move to USD 45-50/bbl would accelerate
this rebalancing process, suggesting that prices will not stay long at
these low levels.
Advising against direct crude oil exposure at current levels also
relates to investors' roll yield costs. Investors already lost 10% of
performance due to the upward sloped forward curve year-to-date.
We believe this raises the importance of timing when investing in
crude oil directly.
Energy equities are an alternative to direct crude oil investments.
They offer investors dividend returns versus roll yield losses, and are
driven more by broader price trends rather than short-term fluctuations.
Energy equities are also a "value play," following significant
underperformance on the back of collapsing oil prices. Consensus
earnings estimates for 2015 have been cut significantly, leaving
room for positive surprises driven by aggressive cuts in capital and
operating expenses.