black gold


Few commodities capture the attention of both the investment community and the general public like oil. Since the 54% decline that began on June 20 2014, commentary regarding expectations of future oil prices, as well as the implications across the global economy, industries, and – most importantly – investment positioning, has captivated investors. While many investment firms have felt compelled to issue immediate and frequent opinions on the dislocation in oil prices, we believe a more deliberate and patient approach yields greater data points from which more thoughtful conclusions may arise.

The purpose of this report is to leverage City National Rochdale’s ability to synthesize and distill independent third-party research, sell-side research, economic data, and industry-specific analysis into an objective, accessible, and actionable investment analysis addressing the impact of crude oil prices for our clients. Our observations specifically highlight:

- Historical Parallels: A balanced market is achieved through supply and demand. Understanding the primary cause of price corrections in the past along with the behaviors and actions of key participants provides valuable context in terms of identifying the most critical factors needed to drive a balanced market. Our examination of oil price history suggests that the period from 1985 – 1986 is most analogous to 2014 – 2015, with the resulting implications that (1) excess supply is the overwhelming contributor to the price shock, and (2) rationalization of Non-OPEC supply – specifically U.S. Light Tight Oil (LTO) – is the primary pathway to a balanced market.

- Macro Analysis: Economic analysis suggests a net positive to global growth, but the ramifications of lower oil prices will not be uniform. Of the major net oil-importers, we expect India and China to benefit the most, followed by the United States, Eurozone, and Japan. Net oil-exporters such as Saudi Arabia, Norway, UAE, and Kuwait have fortress-like capital reserves to withstand a prolonged period of low oil prices, while Venezuela and Nigeria seem to be at most financial risk.

- Oil Market Recovery Outlook: Economic development in a number of emerging markets, discoveries of new energy sources, and technological advances related to extraction techniques have all greatly influenced the supply and demand balance. Despite a seemingly modest supply overhang of 1.0 million barrels per day (mmbd) and pronounced decline in U.S. rig count, we expect a “U”-shaped recovery as opposed to the demand-driven “V”-shaped recovery that characterized 2008 – 2009. We attribute this expectation to the reduced likelihood of the “Call on China” that drove oil demand from 2002 – 2014, shift to market-based pricing as opposed to cartel, operational flexibility unique to U.S. LTO, and access to derivatives.

- Investment Positioning: We favor Integrated Oil & Gas (IOG), Top Tier Oilfield Services, and Midstream Master Limited Partnerships (MLPs) equities while finding relative value within Investment Grade IOG issues. We also believe the High-Yield Exploration & Production sector may eventually offer investors an attractive risk/reward scenario to participate in a potential upswing in oil prices.

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Investment and Insurance Products: 
• Are Not insured by the FDIC or any other federal government agency 
• Are Not deposits of or guaranteed by a Bank or any Bank Affiliate 
• May Lose Value



The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change.

As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money.

Concentrating assets in a particular industry, sector of the economy, or markets may increase volatility because the investment will be more susceptible to the impact of market, economic, regulatory, and other factors affecting that industry or sector compared with a more broadly diversified asset allocation.

There are inherent risks with equity investing. These risks include, but are not limited to stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.

There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall.

Investments in below-investment-grade debt securities and unrated securities of similar credit quality, commonly known as "junk bonds" or "high-yield securities," may be subject to increased interest, credit, and liquidity risks.

Investments in Master Limited Partnerships (MLP) are susceptible to concentration risk, illiquidity, exposure to potential volatility, tax reporting complexity, fiscal policy and market risk. Investors of MLPs are subject to increased tax reporting requirements. MLP investors typically receive a complicated Schedule K-1 form rather than Form 1099. MLPs may not be appropriate investments for tax-advantaged accounts because of potential negative tax consequences (Unrelated Business Tax Income).

Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.

High short-term performance of this strategy is unusual and investors should not expect such performance to be repeated.
Investing involves risk, including the loss of principal.

Past performance is no guarantee of future performance.


The Standard and Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

Oil & Gas Stock Index includes Exxon Mobil Corporation (XOM), BP plc (BP), Royal Dutch Shell plc ADR Class B (RDS-B), Chevron Corporation (CVX), Conoco Phillips (COP), Schlumberger Limited (SLB), Halliburton Company (HAL). Index returns include dividends reinvested; index is capitalization-weighted.

The S&P 500 Energy Index comprises the nine companies included in the S&P 500 that are classified as members of the GICS energy sector.

Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.


EBITDA: non-GAAP financial measure used as analytical indicator to assess business performance, and is a measure of leverage capacity and ability to service debt. EBITDA should not be considered a measure of financial performance under GAAP, and should not be considered in isolation or as alternatives to net income, cash flows generated by operating, investing or financing activities or other financial statement data. As EBITDA is not a measurement determined in accordance with GAAP and is therefore susceptible to varying methods of calculation, this metric, as presented, may not be comparable to other similarly titled measures of other companies.

Yield to Maturity: Expected rate of return for a bond held until its maturity.

Net Debt: Total Debt less Cash balances