Oil won’t break out of the USD 45-50 range in the next 6 months

The MSCI Energy is down 1.33% MTD underperforming the MSCI World Index by 2.01% bps.

Since the OPEC meeting on 25 May, a series of disappointment sent the barrel down even further to USD 42.80 mid of June, losing more than USD 8 since the meeting which itself was first disappointment of a series.

22 straight weeks of increase in rig count, the longest run in 30 years, coupled with an increase in US crude oil inventories during the first week of June (+3.3 Million Barrels vs -3.4 Million Barrels expectations) were major catalysts for the decrease in oil prices. US shale producers, with highly leveraged balance sheets and more than 40% hedge to commodity exposure in 2017, will continue producing even at lower oil prices in the short term, prioritizing production growth and revenue generation versus profitability. OPEC output also played a large role in this decrease as Libya raised its production output by 38% and is targeting an additional 11% increase before year-end. Nigeria added an additional 100 K barrels to the market, with the restart of the Forcado pipeline, attacked in 2016 by Militants.

As a result of successive disappointments, hedge fund pessimism on the crude has increased and has spilled into the gasoline market, even at a time of the year where the demand is usually the highest. The net short position on diesel increased to the most pessimistic in more than a year. We doubt oil will break out of the USD 45-50 range in the next 6 months and are turning more cautious on the sector. In this volatile barrel environment, we continue to prefer integrated companies that show resilience, stronger cash flow performances and good earnings supported by downstream businesses, as well as less direct exposition to the barrel.

Pierre Melki – Equity Analyst Global Equity Research, Energy & Utilities – Union Bancaire Privée (UBP)