Energy Prospectus

BofA Merrill Lynch strategist Savita Subramanian:

"Our commodity strategists estimate that most of the sell-off in oil prices is behind us as they look for WTI oil prices to rally to $54/bbl (+18%) by the end of the year and $69/bbl (+51%) by next June. Oil production continues to fall as global oil & gas investment has been cut by nearly $300bn (41%) and rig counts have dropped by 37% since the 2014 peak. In contrast, low oil prices continue to drive healthy demand growth, putting the oil market on pace to see its biggest supply-demand deficit since 2011. Our commodities team estimates that the deficit will last through 2020 unless we see oil sustain prices above $80/bbl. Given this outlook, we expect the energy sector to outperform the S&P 500 and move the sector to overweight from Marketweight. Historically, when oil has rallied over 25%, Energy has outperformed the market nearly 90% of the time, with average outperformance of 11ppt. The one time that the sector underperformed significantly amid a strong oil rally was when the stock market troughed in 2009, but the sector did recoup most of that underperformance in the subsequent year."

As I noted in The View From Houston, there have been so many large oilfield development projects defunded (cancelled or delayed) that it is hard to see how we are not heading to a global oil shortage within two years.

August 16: Merrill Lynch is calling the bottom in oil, arguing that the rotation into energy has only just begun. The recent summer selloff was but a blip in an otherwise steady rebalancing of the global energy market, Savita Subramanian, head of U.S. equity and quantitative strategy, said in a note. “Oil production continues to fall as global oil and gas investment has been cut by nearly $300-billion (U.S.) and rig counts have dropped by 37 per cent since the 2014 peak,” Ms. Subramanian said.