Merrill Lynch Changes Outlook on Energy Sector
Merrill Lynch has fallen in love again and with the recovery in oil prices, improved earnings outlook as well as attractive valuation, their analysts have now upgraded the energy sector from market perform to overweight. According to analyst Savita Subramanian, with the commodities team increasing their short term forecast of the oil price, this is a clear indication that the bottom for the commodity is now behind us. As oil prices have recently rallied, Merrill Lynch now forecasted that in 2018, WTI crude oil will trade at $75 a barrel while Brent crude oil is expected to trade at $80 a barrel. Adding to this, the financial company estimates that stocks are currently pricing Brent crude oil at $65 a barrel for the long term. As a result of this, this provides traders with a lot of upside potential. Also, from a valuation point of view, the timing is ideal to purchase energy stocks. The reason for this is that since 1986, their price-to-book ratio has hardly moved. Since analysts have made such aggressive cuts regarding earnings estimates, this has enabled energy companies to report better than expected results and added to this, we have seen an improvement in their projected earnings per share. Based on this, the hot favorites for the Merrill Lynch team are the stocks of Exxon Mobil Corp., Helmerich & Payne Inc. as well as Chevron Corp. According to FactSet, Brent crude oil has gained 45 percent since its 52 week low reached on the 13th of January while WTI crude has advanced 37 percent since its 52 week low reached on the 17th of March.
On Friday, U.S. stocks ended the volatile trading session lower. Despite this decline, the Nasdaq Composite Index (COMP) and the S&P 500 index (SPX) booked weekly gains. At the end of the trading session on Friday, stocks sold off. This came after Janet Yellen, the Chairwoman of the Federal Reserve, stated in a speech in Providence, R.I. that a rate increase should still be expected sometime this year. As a result, the Nasdaq ended the trading session at 5,089.36, 1.43 points lower. For the week, the tech heavy index gained 0.8 percent. Meanwhile, the SPX closed 0.2%, or 4.76 points, lower at 2,126.06. Over the week, the benchmark index gained 0.2 percent. Also, the Dow Jones Industrial Average (DJIA) ended Friday’s trading session down 0.3%, or 53.72 points, to 18,232.02. For the week, the blue chip index declined 0.2 percent. Friday also saw the release of a stronger than expected reading of the price inflation measure. With this positive data as well as an improving labor market, the central bank now has the right economic environment to increase interest rates sooner rather than later.
In currency trading on Friday, the U.S. dollar (USD) traded higher. This came in response to positive inflation data out of the U.S. According to the Department of Labor, the CPI (consumer price index) in the U.S. increased in April by 0.1%. This met expectations while in March; we saw a 0.2% gain. Added to this, consumer prices year-on-year, declined 0.2% in April. This missed expectations for a decline of 0.1 percent. The EUR/USD traded at 1.1028, down 0.75% while GBP/USD was also down 0.92 percent and trading at 1.5517. Against the Australian and Canadian dollars as well as the Japanese yen, the greenback traded higher with AUD/USD down 0.76% and trading at 0.7833, USD/CAD up 0.62% and trading at 1.2276 while the USD/JPY was up 0.26 percent and trading at 121.35. Also, the U.S. dollar index was at 96.09, up 0.64%.
On Monday, in early morning Asian trade, crude oil prices increased. This came as investors shifted their focus to the supply-demand in the U.S. while the global economic turmoil also remained in focus. WTI crude oil for July delivery traded at $59.94 a barrel, up 0.08%, on the NYMEX. On Monday, the markets in the U.S. will be closed as a result of Memorial Day. Meanwhile on Friday, crude oil prices declined. This came in response to the stronger U.S. dollar (USD) which was boosted by the slight increases in inflation in April. Brent crude oil for delivery in July traded at $65.33 a barrel, down 1.82 percent, or $1.21, on the Intercontinental Exchange (ICE).