Oil prices will rise at some point, but equity investors should ensure the increase is being powered by rising demand before jumping back in, says CIBC World Markets Inc. in a new report.
According to the report, CIBC’s analysis indicates that oil prices are currently being pressured by a supply and demand imbalance that is, “more tied to unexpected growth in production than weakness in demand.”
However, it argues that this doesn’t mean that the route to sustained higher prices is production cuts. “Although a supply spike was a key part of the plunge, a sustained oil recovery is all about demand,” it says.
That sort of demand increase requires stronger global growth. “There’s no cure in sight for 2015, with global GDP unlikely to accelerate, as recessions in Russia and Brazil, a deceleration in China, and slowdowns in oil-exporting states counter a modest improvement in Europe and healthy U.S. growth,” it says.
As a result, CIBC says that “equity investors need to treat an initial price recovery levered off of supply reductions … with a degree of caution. For energy stocks to be a longer term buy, that initial price turn needs to be backed by the global demand growth that will see renewed life in industry capital spending, particularly if we’re looking at higher-cost firms.”
“Instead of watching each wiggle in [oil] futures, the key will be to focus on global industrial production and vehicle sales for signs of an enduring base of support for demand,” it concludes. “We hope to see some of that evidence come 2016, supported by the policy stimulus being delivered this year.”