It’s always informative to see which stocks Wall Street loves the most at the beginning of a new year.
A review of the components of the S&P 500 Index SPX, -0.89% shows that sell-side analysts expect large-cap oil producers and related companies will make steely investors a bundle of money.
Sterne Agee analyst Tim Rezvan on Friday said his company’s earnings estimates and price targets for oil exploration and production companies were based on a price range of $67 to $72 a barrel for Brent crude oil LCOH5, -0.06% which actually was trading at close to $53 on Tuesday.
But it is very difficult to predict when oil prices will bottom. One factor is that, despite the oversupply that is now obvious, U.S. production won’t decline immediately because long-term projects are already in place and OPEC has decided to defend its market share by keeping production high.
Rezvan said that unless OPEC changes its tune, the oversupply of crude oil “will persist until signs of U.S. production decreases become evident, which is unlikely to occur before mid-2015.”
But that’s only six months from now. It’s possible that the second half of this year will see a change in supply and demand, leading to some sort of recovery for oil, which would prop up oil stocks.
In mid-December, we published a list of nine oil stocks that could be excellent long-term plays for the eventual oil-market recovery, based on strong balance sheets and earnings track records. All but one of those nine stocks have risen since Dec. 15, with four seeing double-digit gains. That shows just how volatile the sector is, and also how quickly stocks can recover if the market stages a recovery.