The share prices of oil companies were thrashed on January 5 as the ongoing slide in oil prices prompted another round of forecast revisions.
WTI dropped below $50 per barrel during trading on January 5, hitting fresh 5 ½ year lows. While it is hard to explain the day-to-day fluctuations in oil markets, much of the blame for the renewed fall in crude prices came from Citigroup, which issued a bearish oil projection for the rest of this year.
Citigroup’s Ed Morse, head of the bank’s commodity division and a respected voice on oil price forecasts, said that there is “trouble ahead in 2015.” His latest forecast marked another downward revision for 2015. Morse now believes WTI oil prices will average just $55 per barrel for the year, down from a previous prediction of $72 per barrel and below some of even the most pessimistic forecasts to date.
Morse says that prices for 2016 do not look much better – he estimates WTI will average $63 per barrel next year, a sharp decline from his prior estimate of $80 per barrel. (Related: Low Prices Lead To Layoffs In The Oil Patch)
Part of the ongoing gloom for prices is the surprising output from producers around the world. Not only is OPEC leaving its production quota unchanged in the face of crashing prices, but Russia continues to ratchet up production, at least for the time being. In December Russia reported a 0.3 percent increase in oil output, reaching 10.66 million barrels per day. That is a record for Russia since the collapse of the Soviet Union.
Iraq has surprised analysts with production nearly hitting 3 million barrels per day for the month of December. That too was a multi-decade record. Not since the 1980’s has Iraq churned out so much oil.
Piling on, Saudi Arabia cut the prices for oil that it exports to the U.S. but raised them for oil moving to Asia. In what could be seen as a move by Riyadh to keep pressure up on U.S. shale producers, Saudi Arabia’s decision to slash prices for crude delivery in February added more momentum to falling oil prices.
Such phenomenal levels of oil output come at a time when the world is already oversupplied, which has forced down the share prices of several of the oil majors.
Chevron was downgraded to “neutral” from “buy” by Citigroup amid the dismal pricing environment. Not only is Chevron suffering from low revenues for its oil, but it is also heavily exposed to liquefied natural gas with billions of dollars tied up in export terminals in Australia. With LNG prices falling in concert with oil, Chevron is feeling the pain.
Oasis Petroleum and Southwestern Energy, two smaller oil and gas exploration companies, were also downgraded on January 5 by Susquehanna.
BP, which is reeling from its exposure to Russian state-owned oil company Rosneft, is seeing profits decline under the crumbling Russian currency and western sanctions. BP’s share price was down more than 5 percent on January 5. The shares of Continental Resources, a major producer in the Bakken, were off by 10 percent. The despair spread to other energy sectors – coal and natural gas stocks were also way down.
The prospect for a turnaround took a hit with Citigroup’s latest forecast. Much of the oil price crash was a supply-driven phenomenon, the bank says, a development that may not ease anytime soon. U.S. oil production, despite the ongoing beating that individual companies are taking, may not immediately take a hit. Iraq may continue to lift oil production now that an agreement has been hammered out between Baghdad and Kurdistan. Saudi Arabia seems determined to keep up output in order to maintain market share.
There have been repeated predictions of a bottoming out for oil prices, but for investors in energy companies, the carnage is not over yet.
By Nick Cunningham of Oilprice.com
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