Investors are gaining confidence—up to a point—that 2018 will be the year of oil stocks.
While shares in top energy companies have risen since mid-2017, they have failed to keep step with recovering crude markets, opening up a historically unusual performance gap. Big oil stocks have also underperformed broader equity indexes, Reuters reported. Uncertainty over whether the crude rally can stick and fears that advances in electric vehicles will undermine long-term demand for oil still overshadow the sector.
But a brighter outlook for oil prices compared with the slump of 2014-15—coupled with a revival in energy companies’ profits and cash generation after three years of brutal cuts—could mark a turning point, according to investors and a string of global banks.
“2017 was a challenging year for investors but there are now real opportunities in the energy sector,” said Olivia Markham, portfolio manager at BlackRock Commodities Income Investment Trust.
She expects oil prices to rise gradually by 2020 as supplies tighten due to a dive in investment in recent years.
UBS, RBC and JP Morgan have put out strongly positive outlooks for the sector in recent weeks, while Barclays analysts predicted on Thursday that earnings for the European integrated oil stocks could grow 20% from the third quarter.
Optimists point to developments like Shell’s rising in November of its cash flow outlook to $30 billion from $25 billion by 2020, assuming prices at $60 a barrel.
“Annus Mirabilis. Highest free cashflow in a decade bodes well for 2018,” Bernstein said in its outlook for European oil majors. Figures for last year are grim, due largely to a dismal first half. The MSCI world energy index, which tracks top oil stocks, gained just 1.3% even though Brent crude hit 2-1/2 year highs.
Europe’s oil and gas sector, which includes Shell, Total, BP and Eni, was the worst-performing in the region.
Oil majors’ shares typically move in step with prices of the crude that they extract, but that correlation broke down last year. Since June, the MSCI index has gained 20% but Brent shot up 50% to around $68 a barrel, after OPEC and other major producers agreed to cut output.
The majors are set to cut spending on oil and gas exploration for a fifth year in a row in 2018, determined to maintain the capital discipline they imposed during the slump.
