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Oil

Shale is the name of the game

The WTI oil price rose a further 7% in January, closing the month at USD 65 per barrel. Shale oil producer stock prices (XOP index) did not follow suit, posting a slight (ca. 1%) decline.

CrudestocksSource : Bloomberg

This lag is largely attributable to shale producers having sold forward part of their 2018 production when the oil price reached the USD 52-57 range, preventing them from fully profiting from the ensuing continued rally. Investor doubts regarding the sustainability of the current oil price also held back shale producer stocks. The early February generalized market correction then pushed these stock prices down in line with broad equity indices (ca. 10%).

As a result, the gap between shale oil companies’ net asset values (the value of their oil reserves less their debt) and their market capitalizations has increased to above 30% on average.

With worldwide oil production still falling short of consumption, inventories will continue to contract during coming months, dropping below their 5-year average and driving the oil price even higher. Once the market becomes convinced of this scenario, shale oil producer stock prices should start to close the gap – with very considerable upward potential in our opinion.

(update : 02.2018)