It is time for oil investors to stop panicking and start picking their favourites for the recovery, according to City broker Liberum, which reckons crude prices will improve in 2016.
Notably, Liberum highlights that prices are currently for new investments to be viable and there will be natural declines in production from operating fields.
The stockbroker’s view is echoed by the International Energy Agency comments which highlighted “unprecedented declines” in investment.
However, the IEA reckons that crude prices are unlikely to return above US$80 per barrel before 2020.
Liberum analyst Andrew Whittock, meanwhile, acknowledged risks remain but said there are reasons that higher oil and gas prices are a sensible assumption.
“Simplistically, with little investment in new oil or gas upstream capacity, the effect of natural declines in existing production will be enhanced,” he said in a note.
“The current 3-5 million bpd loss could become 5-10 million bpd each year. This rate of decline could be enough to re-balance the oil market. It is likely to be helped by more rapid consumption growth, or other demand-side surprises.”
Economic growth rates in China, Europe and America are among the uncertainties identified by Whittock, as are risks relating to oil production and export volumes from Iran and Libya, and any actions of OPEC.
Nevertheless, he emphasised: “The key point for us is that the lack of investment will drag capacity down below that needed by demand and prices will start to firm.
“We expect that to happen in 2016 and our confidence in higher oil prices and valuations has made us more confident in the prospects for a number of E&P shares.”
The analyst says BG Group (LON:BG.), Premier Oil (LON:PMO) and Tullow (LON:TLW) are the UK listed oil stocks with the most “perceived quality and growth” and accordingly he rates all three as ‘buys’.
For the others, Whittock says is still nervous of their relative prospects.
Elsewhere in the oil market, Brent crude was steady on Tuesday Morning at around US$47.15 while West Texas Intermediary futures edged slightly higher to about US$44 per barrel.
Attention will later turn to the American Petroleum Institute crude inventory statistics for last week.
The first of the week’s closely followed stockpile reports come after reports that stores increased at the Cushing hub in Oklahoma by 1.8mln barrels.