Independent Thinking^®

The Latest on Energy, From Evercore ISI

Editor’s note: Evercore acquired ISI in October 2014. The combined Evercore ISI team is a leading provider of sell-side research in the United States and one of the range of Evercore Wealth Management research providers.

Here, Doug Terreson, Head of Energy Research and one of the top-rated analysts in the sector for 18 years, according to Institutional Investor’s annual ranking, discusses the recent plunge in oil prices and its impact on energy stocks.

Volatile Oil Prices

An important driver of the recent weakness is global oil demand, which has been revised lower in six consecutive months by the International Energy Agency, the U.S. Energy Information Administration, and the Organization of the Petroleum Exporting Countries, or OPEC. Global oil demand is a proxy for global economic growth, so the recent weakness raises concerns for the global economy as well. Supply-side factors were significant too, with production growth from OPEC surprisingly strong in recent months.

The Outlook for Oil

The recent weakness in oil prices will enable adjustments on the demand and supply sides of the equation, which in our view should lead to stronger markets. While the changes will likely prove methodical, the current fundamental imbalance is actually not onerous in relation to prior periods. Accordingly, as markets rebalance, we envision sequential quarterly gains in oil prices. Brent crude oil prices should exceed $80 a barrel by year-end 2015, in our opinion, which is counter to the market consensus.

Key Risks and Opportunities

The key risk to our oil market forecast is always economic growth and oil demand. Unfavorable revisions to the outlook for oil demand raise concerns, although lower oil prices should enhance trends in global oil demand in 2015. Regions in which global oil demand will likely recover include North America, Asia and Latin America. These regions delivered 80% of global oil demand growth in recent years, so recovery is important.

Promising Energy Sectors

The significant correction in the exploration and production companies and in oil service subsectors, combined with our outlook for stronger oil prices in 2015, has improved their risk-reward prospects in recent months. We maintain our emphasis on the big oils for now, but the other energy subsectors appear increasingly attractive given the recent correction.