Bank of America has advised clients that now could be a good time to buy “humiliated” oil-related assets, following a crash in the price of crude that has rippled across the energy sector.
“If distressed assets can’t attract a bid now, time to pack up the toys,” the bank’s investment strategists wrote in a note to clients late on Thursday.
The oil market has come under significant pressure during the coronavirus pandemic as fears over dwindling demand and a lack of storage space combined to drive US crude prices negative for the first time in history this week.
Brent, the international oil marker which is less sensitive to storage concerns, has also fallen 70 per cent this year to trade around $20 per barrel, its lowest level since the late 1990s.
The collapse in prices has led oil producers to slash spending plans, cut costs and call on new credit lines. Shares in the US’s biggest oil and gas companies, as measured by the S&P 500’s energy sector, have fallen by just over 40 per cent this year, while oil-producing countries face a sharp hit to their economies.
In a trade idea it calls “buy humiliation”, Bank of America said the falling number of active US oil rigs could trim supply and help the oil price recover, which would then boost emerging market debt and equities.
In the corporate bond market, the premium that investors demand for owning the risky high-yield debt of energy companies instead of ultra-safe US government bonds widened this month to all-time highs, the strategists noted. “It is now or never” to buy, they added.
The Wall Street bank also said a sharp rally in risky assets during the past month could have further to run, with $4.7tn in cash still available to be deployed by investors.
US stocks have rallied sharply since mid-March, as huge central bank interventions and hopes for an end to economic lockdowns have left the S&P 500 only 15 per cent off all-time highs.
Bank of America expects the aggressive policy response to continue, and said a recent run of historically weak economic data should mark a low point in the global slump. “Positioning and policy says [the] pain trade remains up for risk assets,” the note said.