JPMorgan, Barclays Standing Up to Energy Stock Short Sellers

  • Analysts upgrade oil producers, saying rout gone longe enough
  • Rising rates, improving economic growth may provide catalysts

Stock market analysts at two of Wall Street’s biggest firms say the free fall in energy shares has gone on long enough.

JPMorgan Chase & Co. boosted its rating on U.S. energy companies to a buy in a report yesterday while Barclays Plc upgraded global oil producers. For Dubravko Lakos-Bujas, the head of U.S. equity strategy at JPMorgan, a combination of improving economic growth, a contracting crude supply from non-OPEC producers and excessive short selling are likely to mark a turning point.

“Our overweight recommendation for the sector is clearly a non-consensus call with elevated credit spreads, an expected double-digit default rate next year, high short-interest and the Street’s stock ratings are the lowest in more than 10 years,” said Lakos-Bujas.

The calls come as energy stocks are plunging for the fifth day after the Organization of Petroleum Exporting Countries announced last week it will maintain oil production at current levels. Analysts now see earnings by Standard & Poor’s 500 Index energy companies barely budging in 2016 after predicting a 9.7 percent jump as recently as in September, Bloomberg data show. Energy shares slid 1.5 percent as crude fell to the lowest level in almost seven years.

The average yield on debt of speculative-grade oil and gas borrowers has jumped to the highest since the waning days of the global financial crisis in 2009, Bank of America Merrill Lynch index data show. It’s also at the widest spread ever versus the broader U.S. junk bond market.

Average short interest in an S&P 500 energy index is at 5.5 percent, according to data compiled by Bloomberg and research firm Markit Ltd. That compares with a mean of 3 percent in the broader gauge and is the highest out of 10 groups in the index. 

Positioning by commodity trading advisers -- firms that follow trends in market moves -- accounted for between 20 percent to 30 percent of crude contracts being sold, according to JPMorgan. Covering of these shorts may set the stage for a swifter rebound in oil, the New York-based bank said.

Analysts have also cut their price targets for energy stocks by 14 percent since June, while overall estimates for the S&P 500 have held steady, data compiled by Bloomberg show.

Barclays sees investors rotating to so-called value stocks, or shares that are cheapest relative to assets or earnings. The bank also favors equities that have benefited from higher interest rates, a group that includes energy, Barclays said.

“Global equity markets are likely to transition towards different leadership, with the primary driver of the shift coming from the prospects for higher interest rates in the U.S.,” Barclays’ Ian Scott and Dennis Jose wrote in a Dec. 6 report.

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