We are at the beginning of an upward phase in the oil markets cycle, but valuations remain undemanding as the market is not fully appreciating these companies’ earning potential, BlackRock writes in an investment note.

Oil will be boosted by the global economy returning to robust growth last year, says the investment firm; according to the IMF world output grew by 5 per cent last year, and is predicted to expand by 4.4 per cent this year. In this environment, demand for oil is growing at an annualised rate of 1.3 per cent, according to BlackRock, with growth biased towards non-OECD countries.

Meanwhile, on the supply side – which the firm says drove the price rise in 2007 – dwindling reserves are expected to buoy the price. Wood MacKenzie, consultants to the industry, says the world’s existing supply is declining by an estimated net 4-5 per cent per annum. With only 0.4 per cent of predicted supply growth coming from non-OPEC members, according to BlackRock, this leaves only OPEC to take up the slack.

“This suggests that OPEC spare capacity has now peaked at around 5 mb/d and will be gradually worked down over the next few years as the oil market tightens and works off the ‘hangover’ of the slack demand environment caused by the credit crisis, spare capacity and high inventory levels. Notwithstanding the potential for supply shocks, several market analysts are starting to predict that OPEC spare capacity will fall to 2.5 mb/d in 2012, levels not seen since the record oil prices in 2007/08,” the firm said in its investment commentary.

“Considering this backdrop, investors should carefully consider the sector’s long-term potential. In our view, 2011 is shaping up to be the year that energy returns to form, and that will provide significant opportunities with which to invest,” said Robin Batchelor, manager of BlackRock’s BGF World Energy Fund.