Bank of America Merrill Lynch: Oil Will Surge 49% in the Next 8 Months

A Bank of America Merrill Lynch recently published some very bullish research notes on oil, contending that prices will soon reach a bottom and begin a big move up through June of next year.

Savita Subramanian, the head of US equity and quant strategy at Bank of America Merrill Lynch, noted the bank lifted its rating on the energy sector from “Market weight” to “Overweight.” The firm believes that due to falling production, a divergence from equities, and rising demand, oil will soon begin to outperform the S&P 500.

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Chart: Bank of America Merrill Lynch

Subramanian went so far as to predict a 17% jump in oil prices by the end of the year, and a massive 49% surge within the next eight months:

“Our commodity strategists estimate that most of the sell-off in oil prices is behind us, as they look for WTI oil prices to rally to $54/bbl (+17%) by the end of the year and $69/bbl (+49%) by next June.”

“Oil production continues to fall, as global oil & gas investment has been cut by nearly $300bn (41%) and rig counts have dropped by 37% since the 2014 peak. In contrast, low oil prices continue to drive healthy demand growth, putting the oil market on pace to see its biggest supply-demand deficit since 2011.”

Energy is the fourth-most underweighted sector in the S&P 500, and the worst performer relative to the S&P 500 since 2009. In turn, energy represents its smallest portion of the S&P 500 (which is market cap-weighted) in nearly ten years.

Subramanian believes that move will help lead to energy’s future outperformance:

“There has never been a time when the energy sector’s weight has dropped below 7% and the sector did not outperform the market over the subsequent three years.”

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The United States Oil Fund LP (NYSE:USO) fell $0.10 (-1.01%) to $10.27 per share in Wednesday morning trading. The largest ETF tied to the price of WTI crude oil has fallen 6.82% year-to-date.

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