Oil stocks will rebound next year as oil demand will outstrip supply, says Lazard head of UK equities Alan Custis.
Currently oil prices are affected by a supply and demand imbalance, with too much oil production leading to a drop in prices.
However, Custis thinks this will switch next year, as many oil companies have cut back on new production and scrapped projects.
“It’s very clear to us that at some point next year we will see the supply/demand balance shift as there are a number of projects that are not going to be sanctioned,” he says.
His comments come as oil prices moved up in a three-day run that saw prices rise by more than $10 a barrel. However, prices are still more than $46 a barrel lower than a year ago.
Custis has a slight overweight to the oil and gas sector in his £85m UK Omega fund. In conversations with oil companies he says many are not sanctioning any projects, which will hamper supply next year.
The effect of these projects not coming online will be compounded by “the time to restart a project, the reduction in headcount in companies and the inertia in the system”, he says, which “will lead to a natural rebalance” in the sector.
In particular, Custis highlights BG as a particular opportunity, because the market has priced in the possibility of Royal Dutch Shell walking away from its bid for the company.
“It is trading at a 14 per cent discount to the value of the transaction, but we don’t think Royal Dutch Shell will walk away,” he says.
Looking at the smaller end of the market, Custis thinks Premier Oil is a good buy, despite it being highly-leveraged. “It has renegotiated its debt and it has got exciting projects coming soon,” he says.
His comments come as the US Energy Information Administration released data showing production fell in June by 100,000 barrels a day to 9.3 million barrels a day.
The EIA also reduced its estimates for production in the first five months of the year by between 40,000 and 130,000 barrels a day.