Oil vs. equities: Pendulum swings to equities – Goldman Sachs

Analysts at Goldman Sachs explain that a combination of better than expected oil demand growth (on track for c.1.7mbpd in 2017, 300kbpd ahead of IEA’s original expectations) strong OPEC compliance (averaging 106% YTD) and a recent pick-up in supply disruptions and delays have accelerated the rebalancing of the oil market.

Key Quotes

“Tightness is now apparent: high frequency data shows OECD inventories 4% off their 3yr average and distillate inventories close to seasonal lows, while almost every key product and grade is in backwardation. Continued demand strength and OPEC’s commitment to restrict exports should keep the oil market supported, in our view.” 

“But hedging, positioning and non-OPEC ramp still limit upside 

Producers have responded to rising oil prices by hedging at a record pace: swap dealer net WTI shorts have increased c.240mbls in 3Q, the biggest quarterly increase on record, likely leaving E&P hedging at more normal levels heading into 4Q and underpinning activity and production growth for 2018. Increased hedging has been mirrored by speculative buyers, with positioning across the oil complex approaching record length, increasing the risk of volatility, in our view.”

“Equities have lagged oil recovery, expectations now rebased

While the oil market has definitely turned, oily equities have underperformed the oil price year to date and are only just starting to make up underperformance vs. S&P500 and Eurostoxx. We believe that the major driver of underperformance, negative earnings revisions (12%/19% for FY17/18 MSCI World Oil & Gas YTD), may be coming to an end; a continuation of current macro conditions could even lend upside risk to earnings near term, particularly for downstream-exposed companies.”