Good Times About to Roll
Posted: Sat Aug 20, 2016 3:42 pm
The good times are about to roll in the energy sector. Merrill Lynch's note from last week notes in part:
Positioning for the oil rally
Merrill Lynch
August 16, 2016
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. 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. . . .
. . . This underperformance pushed Energy’s weight in the S&P 500 below 7%, roughly half the level of its 1990 and 2008 peaks of 13%+ and at levels not seen since the Tech bubble, when its weight had dropped to 5.5%. There has never been a time when the Energy sector’s weight has dropped below 7% and the sector did not outperform the market over the subsequent three years.
Positioning for the oil rally
Merrill Lynch
August 16, 2016
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. 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. . . .
. . . This underperformance pushed Energy’s weight in the S&P 500 below 7%, roughly half the level of its 1990 and 2008 peaks of 13%+ and at levels not seen since the Tech bubble, when its weight had dropped to 5.5%. There has never been a time when the Energy sector’s weight has dropped below 7% and the sector did not outperform the market over the subsequent three years.