Oil Update: Citi Is Upgrading The Shale Services Sector

• Citi has upgraded the U.S. oil services sector to Buy.
• The firm is intentionally getting in early on the trade based on the difficulty in timing inflection points.
• Citi believes that many stocks are set for huge short covering and sector rotation buying.

In a new report, Citi Research analyst Scott Gruber discusses why the firm finally believes it's time to buy U.S. oil services stocks. Citi has upgraded the oil services sector to Buy and named its top stock picks in the space.

Crude Prices Too Low To Drive Production Growth

With WTI price currently sitting below $40/bbl, Citi believes that the current price environment will likely lead to negative U.S. production growth in 2016 and 2017. If WTI remains at its current level, Citi forecasts U.S. production declines of 600 kbpd in 2016 and 1.0 mmbpd in 2017.

In addition, the firm is confident in a long-term recovery once the current oil glut is eliminated because OPEC appears unable to meet global demand growth on its own beyond 2016.

Getting In Early

According to Gruber, Citi is deliberately getting in on the oil recovery cycle early. "Short covering, sector rotation and crude price upside create a powerful recipe for when the turn arrives and inflection points can be challenging to identify," he explained.

Related Link: Rotate To Energy? JPMorgan Picks 15 Stocks To Buy For 2016

Top Picks

Citi names Halliburton Company HAL and Baker Hughes Incorporated BHI as its top two oil services picks, but the firm also issued new upgrades to several of other stocks in the space.

Citi upgraded the following oil services stocks from Neutral to Buy:

C&J Energy Services, Ltd. CJES

Nabors Industries Ltd. NBR

Patterson-UTI Energy, Inc. PTEN

Superior Energy Services, Inc. SPN

Weatherford International Plc WFT

Citi also upgraded Helmerich & Payne, Inc. HP and National-Oilwell Varco, Inc. NOV from Sell to Neutral.

Disclosure: the author owns shares of Halliburton, Weatherford and National-Oilwell Varco.