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These Sectors Are the Best in a Low Oil Price Environment

The midstream and downstream sectors are likely to hold up better if, as we predict, U.S. supply growth will keep a lid on crude prices.

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Joe Gemino: U.S. tight oil has fundamentally altered the global supply picture. Thanks to ongoing improvements, U.S. shale's cost-competitive growth potential is much greater than the market currently realizes. The world needs some U.S. production growth, but not nearly as much as tight oil can supply. The industry therefore needs to find the oil price that can keep a lid on U.S. shale activity, which we think will be $60 Brent. However, it could take time before this reality is obvious to investors, setting the stage for a medium-term oil price recovery. But higher prices will restart the shale growth machine, and when that happens, the industry is in for a crude awakening.

Current upstream share prices are being priced for a recovery to $70 long-term crude, well above both our $60 per barrel long-term outlook. Upstream stocks could appreciate in the short run as industry fundamentals improve, but bearish long-term fundamentals make a bet on oil-focused E&Ps at today's prices a risky one.

Joe Gemino does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.