Jefferies upgrades oil price forecasts and Tullow shares

Brent crude will average $63 a barrel in 2018, Jefferies forecast in a pair of Wednesday notes on oil companies, up from its previous $57 expectations, with the WTI forecast upped to $59 per barrel from $54.

Analysts said they are "increasingly confident that the oil market will remain undersupplied through 2018" and that oil inventories will fall to five-year average levels in the third quarter of next year.

"The incremental tightness in the market is more a function of robust demand that, while broad-based, is underpinned by accelerating Chinese growth," they wrote, expecting the market to remain tight.

As a result of these crude price upgrades, forecasts for net asset values across its international exploration and production sector coverage increased on average 15%.

Tullow Oil’s successful refinancing without further equity dilution "removes a risk we were concerned about" and the new oil price forecast now suggests $741m free cash flow next year and so lifts Jefferies' target price 3% to 180p.

Tullow shares were therefore upgraded to 'hold' from 'underperform'.

Cairn Energy was also given a price target increase to 235p from 225p on improved net debt, but given the recovery in its share price since the middle of the year, analysts mechanically downgraded to 'hold' from 'buy'.

Delivering at least the expected development of Phase 1 of its SNE project in Senegal "is now both the challenge and the opportunity".

Jefferies' top UK pick in the E&P sector is Premier Oil for its de-risked growth from Zama plus deleverage from Catcher. Premier's target price was upped to 110p

Other UK-listed names include Faroe Petroleum and Ophir Energy both at 'buy' with unchanged target prices of 125p and 90p respectively, while Kosmos Energy remained a 'hold' but with its target cut to 542p.