BMO In a research report released Friday titled Damocles’ Sword, energy equity analysts at BMO Capital Markets blamed the decline in crude oil over the past month on the combination of “tepid demand growth and the prospect of excess supply.”
“The OPEC+ group’s intention to bring back curtailed production in December is now a ‘Sword of Damocles’ overhanging the oil market, exacerbated by fears that Saudi Arabia could move to defend market share as they did in 1985, 2014 and 2020,” they said. “At the same time geopolitical risk appeared to fade into the background as crude oil market speculators-built record short positions. It didn’t last long. The recent increase in hostilities between Israel and Iran has brought geopolitical risk back into focus and led to a modest recovery in oil prices.
“The near-term outlook for crude oil prices is highly uncertain, balancing weak fundamentals against possibility of escalating hostilities in the Middle East. We expect Brent/WTI crude oil prices to trade in the US$75/US$70/bbl range over the balance of the year if the Saudi’s maintain their current level of support and hostilities between Israel and Iran do not escalate; however, prices could easily be US$10+/bbl higher or lower if either of these assumptions prove wrong. From a fundamental perspective, the global crude oil supply-demand balance could begin to tighten in the second half of 2025 if China’s recent fiscal stimulus program and U.S. interest cuts spur incremental economic growth. This could allow the OPEC+ group to stick with their plan of unwinding their production cuts; however, a material improvement in crude oil prices is probably more of a story for 2026.”
Updating their commodity price outlook, they dropped their Brent and WTI price assumption for 2026 to US$81.25 and US$76.25 per barrel, respectively, down 6 per cent from their previous forecast. Their Henry Hub projections also slipped through the end of next year.
“North American oil and gas equities delivered relatively strong performance up until September, led by the Canadian oil and gas group,” the analysts said. “The plunge in crude oil prices over the last month spurred a sell-off in oil and gas equities, which has now translated to year-to-date underperformance. Relatively stable natural gas prices have outperformed falling oil prices and, correspondingly, natural gas weighted equities are now outperforming oil-weighted equities. We expect oil prices to remain the primary driver over equity performance over the balance of the year. We continue to believe that the group will be able to maintain reasonably high levels of cash distributions to shareholders, even during temporary periods of oil prices weakness.”
They added: “Valuations for the North American oil and gas group were attractive; now they are compelling if you believe our oil price outlook. Our top oil and gas recommendations are ARC Resources, Athabasca, Cenovus Energy, ConocoPhillips, Chord Energy, EQT, Headwater, Imperial Oil, MEG Energy, NuVista Energy, Permian Resources, Suncor and Veren. Among the oilfield services companies our top recommendations are Baker Hughes, CES Energy Solutions, Enerflex and Secure Energy. Our top U.S. refining pick is Valero.”