ENERGY SECTOR OUTLOOK: WHAT WE ARE WATCHING

Weekly Market Commentary
By Burt White Chief Investment Officer, LPL Financial
Jeff Buchbinder, CFA Market Strategist, LPL Financial

No sector is getting more attention right now than energy. Market participants are attracted to the potential upside after both oil and the energy sector suffered substantial declines in recent months. Many see the sector as cheap, something that is not easy to find these days in the U.S. equity market. We drive by gas stations every day where we see prices have been cut in half, serving as a constant reminder of how cheap oil is. In this commentary, we discuss what we are watching to assess the opportunity in energy.

WHAT WE ARE WATCHING

Here are some of the key factors we are watching to assess the potential upside
opportunity in the energy sector:
Supply. The massive drop in domestic oil prices (more than 50% since June 20,
2014) has been almost entirely supply driven, with modest contribution from slowing
global growth. Thanks to booming U.S. oil production [Figure 1], inventories are not
only well above the five-year range for this time of year [Figure 2, page 2], but they
are near their highest levels on record. According to the International Energy Agency

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(IEA), the global oil market is currently about 800,000 barrels per day oversupplied (for perspective, the global oil market is roughly 94 million barrels per day). We do not expect a rapid supply response from producers given low marginal costs of continuing the most cost-efficient production, which means that lower prices may be required to balance the market. We would expect the bottom in oil to be put in once the market sees actual and meaningful supply reductions, which has not happened as of yet and… Read Full Report Here: Market Commentary 02172015