UBS Picks ‘Big Oil’ Stocks Over Crude as Prices Seen Back at $40by
Oil prices will fall to $40/bbl before rebounding to $55/bbl
OPEC meeting this week not seen resulting in “too much”
Forget about buying oil. Own a piece of the biggest companies that are producing it instead, according to UBS Group AG.
“Big oil is what I own now because they’re less sensitive to movement in price and they’re going to pay me a dividend,” said Wayne Gordon, executive director for commodities and foreign exchange at the bank’s wealth management unit. Companies including BP Plc and ConocoPhillips have cut spending and repaired their balance sheets, making them more attractive over crude, which is expected to retreat to $40 a barrel in the short term, he said.
Oil majors have weathered a market rout that saw crude sink to a 12-year low in February by lowering capital expenditure, renegotiating drilling contracts, slashing jobs and deferring projects. While prices have surged more than 80 percent since then amid lower U.S. output and supply outages from Canada to Nigeria, these unplanned disruptions are temporary, Gordon said in an interview in Singapore on Monday. The decline in U.S. production may also slow as prices recover, he said.
West Texas Intermediate for July delivery traded at $49.15 a barrel on the New York Mercantile Exchange at 4:59 p.m. Singapore time. Prices have slumped over the past two years as OPEC adopted a policy of squeezing out high-cost rivals including U.S. shale producers. American crude output fell to the least since September 2014 in the week ended May 20, while the number of active oil rigs are at the lowest level since October 2009.
Members of the Organization of Petroleum Exporting Countries will gather in Vienna on Thursday to discuss the oil market, with all but one of 27 analysts surveyed by Bloomberg saying that the group will stick to its strategy of maintaining output to defend market share. The plan seems to have worked as the International Energy Agency and Goldman Sachs Group Inc. say supply and demand are moving back into balance.
“We don’t think this meeting is going to come to too much,” Gordon said in a separate interview on Bloomberg TV. “The key here is whether the undrilled wells in the U.S., given the increase in price, start to be explored and start to produce.”