The market is either saying there's value in oil stocks or the commodity price is headed downwards. This is the conclusion of a study by Westhouse Securities which finds that global oil equities are pricing in $82 per barrel of West Texas Intermediate (WTI) oil (the key US benchmark for crude) compared with the present level of almost $97 per barrel.


The broker has made this assessment from an analysis of the Bloomberg Global Oil index and its historic relationship with WTI.


Analyst Dragan Trajkov draws three alternative conclusions from the disparity: 'Either 1) there is significant value in oil equities; 2) investors expect downward pressure on the oil price; or 3) a combination of the two.'


Crude Oil-Brent Cur Month FOB U$BBL - Comparison Line Chart (Actual Values)


Trajkov notes stocks in Europe and the Middle East (EMEA) are pricing in just $72 a barrel compared with US equities more or less in line with WTI's current levels. He adds: 'Based on these figures, it appears that investors are not willing to take the risk of the emerging markets and feel more comfortable with the North American names (and are willing to pay for it).'


The report also reveals the divergence between the EMEA and US oil stocks is at its highest level since the beginning of 2009. This is despite the fact WTI trades at a discount to Brent, the main yardstick for oil in the EMEA region (see chart above).


A slowing Chinese economy and the ongoing economic crisis in the eurozone have been contributing factors in dampening the world's thirst for oil. On Wednesday (12 Jun) the International Energy Agency cut its forecast for global crude demand in 2013 by 80,000 barrels of oil per day (bopd). It now expects consumption of 90.6 million bopd, 785,000 bopd more than in 2012.

Issue Date: 14 Jun 2013