Opportunities as Oil Nears Bottom: BlackRock

Could oil prices be close to a trough/?

BlackRock’s global chief investment strategist, Richard Turnill, believes that oil prices are in a bear market.

Writing in BlackRock’s weekly market commentary, Turnill points out that both Brent (the international price benchmark) and West Texas intermediate (the American benchmark) have declined more than 30% from 2018 highs.

“We see oil prices near their nadir and a potential price recovery opening up opportunity for investors,” he writes.

One reason Turnill thinks oil prices may be near a bottom: Production appears set to decline after oversupply concerns contributed to the recent rout.

The Organization of the Petroleum Exporting Countries (OPEC) and its partners are expected to cut production at their Thursday-Friday meeting this week in an effort to help stabilize prices, according to Turnill.

“We estimate a cut of roughly 1.2 million barrels per day this round,” Turnill writes. “This is in the middle of the consensus range, as we see U.S. production growing slightly less than some market participants, but enough to help manage oversupply, in our view. Pressure from the U.S. government to avoid high prices may limit the size of the cut and could inject some downside, however.”

On Monday, oil prices settled with a 4% gain as optimism ahead of the OPEC meeting grew after Russian President Vladimir Putin said he and Saudi Crown Prince Mohammed bin Salman agreed to extend output cuts on the sidelines of the weekend G-20 summit, MarketWatch reported.

Where does Turnill see opportunities?

Turnill notes that energy equities and debt have suffered along with crude to varying degrees.

“Energy stocks underperformed spot oil prices at the beginning of the selloff but recently have declined only about half as much,” he writes.

Yet Turnill believes the recent price reset may offer an attractive entry point as capital discipline and balance sheet management remain priorities for many energy companies.

“We see some opportunities for investors willing to stomach volatility,” he notes.

Within energy equities, Turnill prefers midstream firms focused on oil storage and transportation.

“Their high-yielding nature may offer a buffer in a risk-off environment,” he writes.

Turnill also favors oil field service companies longer term, as U.S. shale is needed to help meet global demand in the 2020s. In fixed income, Turnill prefers midstream companies in the investment-grade space and selected high-quality exploration and production firms.

More broadly, Turnill thinks global equities appear less sensitive to oil price fluctuations than in the past.

According to him, “an oil price rebound driven by higher demand amid above-trend global growth may be good for risk assets.”

A supply adjustment that puts a floor under oil prices may not have as widespread an impact, he adds.

“Stabilization in the oil price should help global markets going forward, but we expect there will be winners and losers, particularly in some emerging markets,” Turnill writes. “Markets in oil-exporting countries could benefit from stabilizing prices, though a big bounce could hurt markets in importing countries with current account issues.”

— Check out What Oil at $50 a Barrel Means for the World Economy on ThinkAdvisor.