Despite Recent Volatility, Oil Prices Should Stabilize and Move Higher

After several months of slow but steady gains, oil prices are once again proving to be fickle. In March, a barrel of West Texas Intermediate (WTI) crude traded as low as $47, down 14% from the month prior. The selloff was driven largely by news that U.S. crude stockpiles and drilling were on the rise, offsetting production cuts by the Organization of the Petroleum Exporting Countries (OPEC), planned for the first half of 2017.

But the selloff didn’t last long. By late March, the U.S. Energy Information Administration (EIA) reported that weekly U.S. crude stocks climbed more slowly than expected, thanks to a jump in U.S. oil exports, increased processing at refineries and supply disruptions in Libya. As a result, oil prices began to rebound.

So what’s next for oil – and energy stocks? We believe that although crude prices may bounce around for now, prices will stabilize in the long term. For one, OPEC’s reduced output is being honored by most members, with some countries even suggesting that the cut could be extended for an additional six months. An improving global economy could also stoke demand. Indeed, in its most recent monthly report, the International Energy Agency projects that the supply/demand balance will start to shift toward stronger demand in the second half of 2017.

In the meantime, we think a U.S. drilling boom could be extremely beneficial for midstream operators. These companies help transport and store oil, as well as byproducts such as natural gas, ethane and propane. In fact, these latter products often get overlooked by the market but, in our opinion, will likely be important drivers of growth for operators. U.S. production of ethane, for example, is projected to increase from an average of 1.25 million barrels per day in 2016 to 1.7 million in 2018, according to the EIA. With demand for ethane (used to make plastics) also expected to rise, we believe midstream firms stand to gain.

For more on our take on energy, as well as other sectors covered by Janus analysts, please see our Global Sector Views Report .

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