There have been a number of surprises in 2017 and the performance of commodities is likely to feature near the top as many were not expecting this year to be a particularly good one for the asset class.
This is particularly so for oil as oversupply fears from unconventional (namely shale) producers and waning demand as the world moves closer towards embracing electric cars have really put a dampener on the market.
But lo and behold! Oil has delivered a Christmas surprise as the benchmark Brent Crude price jumped a further 1.4% last night to hit US$63.31 a barrel. This takes its price gains to around 17% over the past year.
If the commodity continues to defy sceptics, we will likely see a rush of earnings upgrades for our listed oil producers.
That will be great news for our large cap energy producers like Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH) and Santos Ltd (ASX: STO).
We can also include BHP Billiton Limited (ASX: BHP) to the list as petroleum accounts for around 20% of its earnings before interest, tax, depreciation and amortisation (EBITDA).
There are still many more bears than bulls in the market with the latest forecasts from the US Energy Information Administration (EIA) tipping that the benchmark price will drop to around US$57 a barrel in 2018.
Many analysts are even more cautious about the outlook for oil as there are few incentives for them to break from consensus and stick their necks out to look like the bull in a china shop.
This leaves plenty of room for upside earnings surprises in the sector. To provide some context, Macquarie Group Ltd (ASX: MQG) noted that if the current spot price were to hold, its FY18 EBITDA forecast for BHP will jump by 30% – putting the stock on a very attractive P/E multiple of around 10 times with a free cash flow yield of circa 13%.
However, Macquarie's official oil forecast is a lot more bearish even though it has upgraded its Brent forecasts by US$6.40 to US$55.70 a barrel for the next calendar year.
Given that most analysts have been behind the eight ball in 2017, I suspect we will see more upward revisions to the consensus oil price forecasts next year.
The impact of this outcome on our energy producers is probably more significant given that their earnings are more leveraged to the oil price.
On the other hand, higher oil prices will give BHP's shareholders extra reason to smile as the mining giant is in the process of divesting its unconventional oil assets.
Looking for another bullish investment thematic for 2018? Click on the link below to claim your free report from the experts at the Motley Fool on the next big investment wave to hit our market.
