While the general European equity index remained flat over 2016, the energy sector gained 21 percent. This performance contrasts with 2017 where equities in general are up 8 percent while the energy sector lost 9 percent.

This is also opposite to my expectations since January; that the energy industry would outperform the market in general. My view was based on evidence that the sector had adjusted to the new reality of a lower price environment. The European large caps, in particular have made significant and sustainable changes in the past three years, enabling decent returns in a $50 per barrel world.

Unfortunately, the price of oil did not fully cooperate in 2017 and has traded below the critical $50 level more often than not despite OPEC’s efforts to control the supply side. Currently the WTI crude August contract is trading at $43.43 per barrel.

Supply increases from the US, Libya and African regions have dampened OPEC’s intentions. This, together with a long-term shift towards electric vehicles, renewable energy supply and increased shareholder awareness on carbon emissions, are keeping investors guarded.

The International Energy Agency does not expect current global demand to make up for non-OPEC increases in the short-term. Weaker demand in China and Europe have increased the imbalance. Nonetheless, significant inventory reductions are expected in the second half of the year on a seasonal upswing in demand.

2018 will probably see the over-supply story continue. Strong growth from US Shale will likely coincide with rising production from OPEC and Russia after the expiry of the current output agreement. OPEC is not expected to revert to its ‘race to the bottom’ strategy. Still small increases will likely result in the market being oversupplied again next year.

This outlook is not favourable for the long term investor in the oil sector. If supply expectations persist, the market price will likely remain under pressure. However, given the current large fall in price a bounce back towards $50 per barrel would not be surprising. In addition, Saudi Arabia is extremely reluctant to see the price of oil fall too much due to its intention of offering an IPO on its oil companies.

Thus short-term traders may profit from the current levels. I would set a target price at around $50 per barrel. This represents a 14 percent upward movement. Still I would not exclude the risk of further downside, so a decent stop-loss limit is imperative.

In my opinion, long-term investing in this sector is not a top pick as consumer trends continue to turn away. The large European multinationals will still continue to be profitable, however, the golden era for this sector lies, probably, in the past. And unless there is a significant jump in the price of oil, increases in earnings to sustain earnings growth is off the cards.

This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.