Energy

Oil markets will continue to be buffeted by Russian overtures to OPEC suggesting a desire to orchestrate a production cut-back, while uncertainty over the Fed's next move keeps markets on edge.

Energy service stocks are so oversold and cheaply valued that contrarians are chomping at the bit to establish long positions. Is it time? In previous research, we have cited a number of common elements at bear market troughs: a cresting in total OECD oil inventories; a peak in global crude oil production; and a rising global oil rig count. These conditions do not yet exist, and OPEC seems unlikely to turn off the taps, lest cede market share that they have worked so hard to protect. However, the downturn in U.S. oil production may be providing a preview of what to expect in the rest of the world, particularly as credit and equity market stress robs producers of the access to capital needed to fund drilling programs. There is still a large amount of drilling slack to mop up before pricing power will improve, but the scope of bear market suggests share prices will turn well in advance of any fundamental improvement. We upgraded to neutral last October, and continue to look for an attractive point to shift to overweight. The ticker symbols for the stocks in this index are: BHI, CAM, DO, ESV, FTI, HAL, HP, NOV, SLB, RIG. bca.uses_in_2016_02_03_002_c1 bca.uses_in_2016_02_03_002_c1

Any recovery in risk assets and selloff in safe havens is unlikely to extend into the cyclical horizon.

The Fed will upset the rebalancing of oil markets if it misreads the current sell-off as weakness in oil demand.

The U.S. corporate re-leveraging cycle is far more advanced than is widely believed. Corporate health looks only mildly better excluding the troubled energy and materials sectors. Mushrooming leverage ratios are not restricted to junk issuers either.

Equity selloff alone will not catch the Fed's eye unless there is an outright crash.