Extended Oil Cuts May Not Lift World's Worst Equities

Not even an extended OPEC deal may suffice to lift the world’s worst-performing equities this year out of misery.

Oil stocks have tumbled 6.6% this year, the only group to decline in the MSCI All-Country World Index. While the Organization of Petroleum Exporting Countries and its partners are expected to prolong output cuts into early 2018 at next week’s meeting, the benefit to energy shares will likely be short-lived, say investors and analysts, Bloomberg reported.

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“We don’t think the oil price will go much higher so there isn’t enough room for energy stocks to rally,” Simon Wiersma, an Amsterdam-based investment manager at ING Bank NV, which oversees about €26 billion ($29 billion), said by phone. “The positive response to the output cut may disappear or water down because there’s always the question over which countries will follow through on the production cuts.”

Energy shares, last year’s biggest winners, have tumbled in 2017 as oil retreated on concern about increasing US output. While Russia and Saudi Arabia said this week they’re in favor of extending output curbs until March to shrink global stockpiles, Societe General SA said this isn’t a “game changer” for the oil price. The next OPEC meeting is in Vienna on May 25.

“Stable oil prices between $50 and $60 per barrel are currently priced into oil shares,” Rob West, an analyst at Redburn (Europe) Ltd., a London-based equity broker, said by email. He has an underweight rating on the oil sector. “Deepening the cuts will reassure the market, but some investors may start wondering about the consequences when OPEC eventually ‘uncuts’.”

The 11 non-members joining OPEC’s effort have only implemented about two-thirds of their promised reduction so far, according to the International Energy Agency. Cutbacks in Russia came alongside seasonal stagnation in activity, and prolonging them would thwart plans by companies to expand production. To keep a lid on output this summer, Saudi Arabia will need to sacrifice an even bigger share of exports as consumption at home rises.

“If we reach $60 per barrel by the end of the year, that might encourage Saudi Arabia and others to increase production and reap some of the increased cash flow for budgetary needs,” said Angelos Damaskos, a portfolio manager of UK-based MFM Junior Oils Trust Fund.