Whisper it quietly but the energy market might be at a key turning point – especially for energy stocks. The mood on crude oil markets continues to improve, as global stock-decreases accelerate and US exports rose to more than 2mb/d. According to energy analysts at SocGen, money manager positioning on WTI crude oil is catching up with Brent crude, with money managers increasing their long positions significantly.
The French bank’s analysts have looked at the latest CFTC report, and reckon that “money managers increased their long position by 19,692 lots – approximately equivalent to an inflow of $1.07bn – while reducing their short positions by a sizeable 35,576 lots (97th percentile change). Short bets on WTI now account for less than 4% of total open interest, while the number of long money managers remained unchanged at 80 [my emphasis]. Our dry powder analysis shows that there is significantly more latent price potential on WTI crude compared with ICE Brent. The number of long money manager traders on ICE Brent rose to 113 (the second highest number on record).”
This firming in prices probably won’t have an immediate effect on the bottom line of most quoted US and European corporates. Another cautious note last week from analysts at Goldman Sachs observes that in terms of reporting results, 28 E&Ps/supermajors, representing approximately 47% of gross 2017E US oil production, have released 3Q results thus far, “with aggregate US oil production relatively in-line with our estimates (28K bpd, or 0.8%, lower than GS expectations in total). As a result, we make slight downward revisions to our 4Q17 US oil production forecasts (-0.5%), though FY18 and 4Q18 yoy growth rates are flat/slightly up vs. prior estimates. We expect 15% aggregate growth from covered producers that have reported thus far (flat with 15% prior), with 4Q18 vs. 4Q17 growth up slightly to 13% vs. 12% previously.” Crucially though the GS analysts observe that “ if producers look to keep capital budgets closer (or below) today’s levels, we could see potential for lower production growth vs. our +0.8-0.9 mn bpd growth estimate in 2018, providing risk to the downside to overall US oil growth, which would be macro bullish”.
In simple, laymans terms, even the big disruptive US players are looking to rein in their capex spending. If this is a genuine signal for sustainable, higher, oil prices, we could see a major turning point for energy stocks. Morgan Stanley analysts in Europe certainly seem to think so. In a note to their investors last week they hail the move above $60 a barrel which has “occurred despite a recovery in the USD, which tends to be a negative for commodity prices”. Slowly but surely we’re seeing these prices seep through into profits – “despite the rebound in the sector, Energy doesn’t look particularly stretched, especially in comparison to many other cyclical sectors. Energy is still the second-worst performing sector year-to-date in Europe, and despite rebounding to the highest relative level since May, the sector still looks depressed relative to the move in the oil price ( see chart below). Through what has been a strong earnings season for the sector so far, earnings revisions for Energy are now at their highest level since 2008, when oil was at $146.”
On a personal level, I’m still fairly long the energy sector but remain ever so slightly cautious. I’m not convinced OPEC can hold the line and I also think the US unconventionals sector will blow their capex budgets and pump too much stuff out of the ground. But the global economy is in a strong position, so maybe I’m being too cautious? If I am my guess is that most levered way of playing a recovery is to look at outfits such as Premier Oil and Enquest in the North Sea. I own both originally via their bonds but have now in effect got additional shares. These stocks could easily double or even treble if oil prices remain high. Fingers crossed!