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Large-cap energy stocks are now so disconnected from the oil market fundamentals that they could be up for a sharp short squeeze in the near future, JPMorgan analysts say.
There is “increasing potential for a sharp short squeeze and move higher, given its extreme disconnect from oil fundamentals,” JPMorgan strategists, led by Dubravko Lakos-Bujas, said in a note on Tuesday carried by MarketWatch.
Energy, together with consumer retail, travel, and leisure, banks, and semiconductors, are the sectors which JPMorgan considers “strong buys at current levels.” The recent declines in those sectors have created many “attractive opportunities”, the investment bank said on Tuesday, after equity and oil markets crashed on Monday in a broad sell-off due to fears that the Delta variant would slow economic and oil demand growth in case of new restrictions in some countries.
Oil prices plunged by more than 7 percent on Monday, for the worst one-day loss so far this year and the worst single-day drop since September 2020.
Despite the market crash from Monday, JPMorgan remains bullish on equities.
“We remain constructive on equities and see the latest round of growth and slowdown fears premature and overblown,” said the bank’s team as quoted by MarketWatch.
According to JPMorgan, the economic recovery is in an early cycle, slowly moving toward mid-cycle, despite the fact that “equity leadership and bonds are trading as if the global economy is entering late cycle.”
JPMorgan also sees oil prices likely jumping to $80 per barrel by the end of this year due to rising demand and muted supply additions, Barron’s reports, citing a note from the bank’s analysts.
The demand recovery from the pandemic combines with “the unintended consequences of ESG” policies which reduce capacity for fossil fuel production faster than global energy demand could turn to renewables to replace it, according to the JPMorgan note cited by Barron’s.
Goldman Sachs also sticks to its $80 oil forecast for later this year, and even said that the OPEC+ deal adds a $2 a barrel upside to that outlook.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.