In a new report, analysts at Citi Research updated their outlook for the global oil industry. Their analysis included an in-depth look at the industry supply curve.
Oil Price Recovery
Analysts see an eventual recovery in crude oil prices, but not to anywhere near the price levels seen prior to the collapse. Citi, which believes that WTI prices will fall “well below” $40 per barrel in Q2, is calling for Brent prices to reach $60-$80 per barrel by 2017 based on future supply needs.
Analysts also clarify that they see “little rationale” for oil prices to recover to the $100-plus range in the future.
Shares of the United Sates Oil Fund ETF USO 4.73% are down about 50 percent in the past year.
Investment Opportunities
The oil environment that Citi describes would prove to be a challenging one for investors. However, analysts point out pockets of growth opportunity in U.S. shale, Brazil, Kurdistan and Russia. Citi expects that LNG-focused companies, heavy oil–focused companies and “most of the Big Oil names” will be hardest hit while oil prices remain below $75 per barrel.
Shale Picks
Analysts believe that most U.S. shale plays are fully valued, but they do like a handful of names in the space. They mention Devon Energy Corp DVN 1.19% and ConocoPhillips COP 1.52% as top shale stocks.
Self-Help
Analysts believe that the sooner companies come to terms with the new oil environment and start taking a proactive approach to the future, the sooner they will be able to re-position themselves for growth. “For companies challenged with stranded assets,” analysts explain, “we look for companies to protect ROE through self-help.”
Citi lists Total SA (ADR) TOT 2.6% and Statoil ASA(ADR) STO 3.22% as the stocks with the most self-help potential.
After shares have climbed more than 17 percent in the past three months, Citi no longer sees much self-help potential remaining for BP Plc BP 1.48% and downgraded the stock from Buy to Neutral.
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