Posthaste: Bank of America emerges as biggest Wall...

Good morning!

Canadian oil and natural gas stocks were pariahs last year, but now analysts are falling over themselves to be the first to push out bullish reports.

Rising crude oil prices have rallied further after investment bank Goldman Sachs raised Brent crude price forecast by US$10, with expectations for it to reach US$70 by the second quarter and US$75 in the third quarter. Brent crude was up 0.5 per cent to US$65.60 a barrel this morning, and U.S. crude rose 0.6 per cent to US$62.09 a barrel.

“We now forecast that oil prices will rally sooner and higher, driven by lower expected inventories and higher marginal costs — at least in the short run — to restart upstream activity,” Goldman analysts wrote in a note over the weekend.

Not to be outdone, Bank of America Francisco Blanch said Brent crude oil prices could spike to US$100 by 2026.

Blanch believes the biggest short-term downside risk to oil prices may come from a new Iran nuclear deal, as a new arrangement could bring 2 million barrels per day into the market.

“Yet, three major factors should continue to support the energy price recovery: (1) improving micro oil supply/demand fundamentals, (2) an unprecedented global fiscal and monetary stimulus, and (3) a stronger external position in China, the world‘s largest commodity importer,” Blanch said. “What does it mean for oil in the medium term? Despite the turbulence, we project Brent to average US$50 to US$70/bbl out to 2026, and we believe prices could spike to US$100/bbl over this period.”

Canadian oilpatch stocks shot up higher on the positive outlook on Monday. Suncor Energy Inc. surged 8 per cent to finish the day at $25.90 per share, while Imperial Oil Ltd. jumped nearly 7 per cent to $28.55 per share. The S&P/TSX Capped Energy Index has climbed 22 per cent this year, compared to the main benchmark which is up 5 per cent.

“Global investors have been rewarded for underweighting energy in recent years—and especially 2020—but may want to rethink this positioning,” wrote Michael Harvey and Luke Davis, analysts with RBC Dominion Securities Ltd, in a note on Canadian oil and natural gas producers.

“Limited upstream investment, an improving demand landscape as the roll-out of COVID-19 vaccines unfolds globally, capital discipline and a focus on strengthening balance sheets have placed battered and bruised energy stocks in a much better place.”

RBC also updated its Brent crude outlook to US$64 in 2021 and US$66 in 2022, and expects Western Canada Select differentials to narrow to around US$11 to US$12 over the next two years.

Regulatory filings also suggest global investor interest is back in Canadian producers.

“As such, the momentum in CDN oil & gas is likely to continue with the improvement in the macro environment and the many institutional investors that have yet to come back to the space,” wrote Jeremy McCrea, analyst at Raymond James.

The growth momentum in the Canadian oilpatch is turning into a virtuous cycle, with investors cycling through from the big names and into mid caps and smaller companies.

“We are encouraged with ownership trends seen with ARC (ARX), Tourmaline(TOU), and Whitecap (WCP) and smaller names including Spartan (SDE), and Headwater (HWX),” McCrea said. “As new investors look to come into the sector, existing holders seem to show good confidence with these names, which likely ultimately attracts more future buyers.”

While oil-weighted stocks have rebounded sharply in the past three months, rising on average 62 per cent, they remain well below Jan. 1, 2020 levels — so there is more room to run, Scotiabank said.

“Canadian firms offer attractive valuations compared to Supermajors and U.S. peers,” wrote Jason Bouvier, analyst at Scotiabank. “In 2021,Canadian oil-weighted large caps and SMID (small and mid) caps have average DAFCF (discounted free cash flow) yields of 14 per cent and 18 per cent, respectively, compared to the supermajors and U.S.-oil weighted averages of 7 per cent and 7 per cent, respectively.”

But it’s still OPEC’s world — Canadian oil producers just live in it.

OPEC oil producers and their allies are expected to meet on March 4, with sources telling Reuters that the group is likely to ease curbs on supply after April.

“With Brent trading into the US$60-65 range, we expect OPEC+ to counter, adding more than 1.3 million bpd of supply in the second quarter and ramping further into year-end to keep prices and balances in check,” notes Bank of America, Francisco Blanch in a report.

While Saudi Arabia is keen to keep production in check to maintain higher prices, Russia has suggested production would return to normal.

“We still expect that Russia will push for a significant rise in production, which could soon weigh on prices,” Hans van Cleef, senior energy economist at ABN Amro told Bloomberg.