This sector just got a big earnings upgrade from Macquarie Group Ltd

Our market looks like it’s gotten its mojo back! Easing political tensions and a retreat in US government bond-yields was enough to bring the bulls back dancing on the streets – at least for now.

All sectors are firing up, except for the poor big banks like Commonwealth Bank of Australia (ASX: CBA) and friends, although these index heavyweights weren’t enough to keep the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) from staging a 0.3% jump this morning.

But the real action could be in the oil and gas sector after Macquarie Group Ltd (ASX: MGQ) upgraded its forecast for crude oil by a whopping 20% in 2018!

The broker is now predicting the Brent crude benchmark to average US$70 a barrel this calendar year, up US$15 a barrel from its previous forecast, and has lifted its 2019 forecast by around 5% to US$57 a barrel.

While Macquarie (and most other experts for that matter) believes the price of crude will moderate in the coming years, the flow-on effects to earnings expectations for a number of ASX-listed oil & gas producers is very significant.

Perhaps more importantly, today’s upgrade signals the bullish sentiment towards the sector for 2018, if not beyond.

There are a number of tailwinds supporting the warm fuzzy feeling in the sector (and believe me, investors seldom feel this way towards energy stocks). Firstly is Iran, as the US is looking to reimpose sanctions against that country, which is also a major oil exporter.

Then there is discipline among OPEC members and their oil producing friends who have largely stuck to their reduced quotas on crude production. This really took experts by surprise as OPEC has a long history of bending their “friends” and each other over the barrel (all pun intended although the imagery isn’t for the faint-hearted!).

Demand for oil has also been another surprise in the face of the global movement towards electric vehicles. The transition has been slower than thought, though a pick-up in global economic growth is adding to demand for crude.

It’s hard to feel bearish towards oil this year, especially given the big earnings upgrades from Macquarie. The broker upped Oil Search Limited’s (ASX: OSH) earnings per share (EPS) by 66% to 23.8 cents for 2018, while takeover target Santos Ltd (ASX: STO) received a 34% boost to its EPS to 22.2 cents and Woodside Petroleum Limited (ASX: WPL) enjoyed a 22% increase to its EPS to 202.8 cents.

This was enough for Macquarie to upgrade its recommendation on Woodside to “neutral”, although the broker favours Oil Search, Sino Gas & Energy Holdings Limited (ASX: SEH) and Senex Energy Ltd (ASX: SXY).

Macquarie has an “outperform” rating on these three stocks.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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