- Crude oil has rebounded by almost 8% to $33.60 per barrel.
- However, the bounce is unlikely to make analysts more optimistic about oil stocks or the outlook for the oil price, given the unresolved price war between Russia and OPEC.
- Goldman Sachs said Monday that $20 per barrel Brent Crude is now a real possibility. Damien Courvalin, Goldman’s oil strategist, wrote in a note to clients that “The prognosis for the oil market is even more dire than in November 2014, when such a price war last started, as it comes to a head with the significant collapse in oil demand due to the coronavirus.”
- SunTrust analyst Neal Dingmann calls the situation “energy Armageddon” (Bloomberg), and informed clients that “We have taken the unprecedented steps of bringing our full coverage group to Hold or Sell.” Charles Meade of Johnson Rice & Co. told clients that “Not one company in our coverage can keep production flat for more than a few months while spending within cash flow at $35 WTI.”
- Shale drillers, already facing stress from inadequate cash flow and maturing debt, are under particular stress from the oil price war. Diamondback Energy announced that it would slash full-year production plans. Bill Zox, chief investment officer of Diamond Hill Capital Management, told MarketWatch that “there is a certain subset of energy companies like Chesapeake (NYSE:CHK) that will not survive.” Permian Basin drillers’ stocks have been pummeled.
- Pioneer Natural Resources (NYSE:PXD) CEO Scott Sheffield told the Washington Post yesterday that “we are preparing for two years of low prices and will make the necessary adjustments to maintain our great balance sheet. There will be many bankruptcies in our industries and tens of thousands of layoffs over the next 12 months.”
- International Energy Agency Executive Director Fatih Birol tweeted: “With a combination of a massive supply overhang and a significant demand shock at the same time, the situation we are witnessing today seems to have no equal in oil market history. In some major producer economies, sustained low prices could make it almost impossible to fund essential areas such as education, health care & public sector employment.”
- In the latest developments, Saudi Arabia announced plans to supply a record 12.3M barrels of oil per day next month, up 25% from the previous month, as it ratchets up its oil price war with Russia.
- Russia, meanwhile, has prepared for a prolonged price war, according to Vladimir Zernov. “I’ve seen opinions that Russia may quickly come back to the deal if the oil price drops hard enough. In my view, such a U-turn is practically impossible. First, Russia would suffer a political blow — the last thing that Russia wants is an image of a weak player who raises the stakes only to get scared to death a few months later. Second, Russia will need time to see that the damage is done to U.S. shale. As Russia learned since the oil price collapse of 2014-2016, American companies are very flexible, and U.S. bankruptcy laws support continuation of production. Therefore, months of low oil prices are required to test the assumption that low oil prices will do sustainable damage to American oil production. Third, Russia is finally equipped to endure a prolonged fight given the size of its reserves and the flexible ruble exchange rate (the key achievement of the monetary policy since 2014).”
- Bottom line: For owners of energy stocks including OXY, CVX, CXO, PXD, FANG, EOG, APA, XOM, XEC, PE, RDS.A, DVN, NBL and ETFs XLE, XOP and OIH, analysts believe it will take more than a one day, incomplete rebound in the oil price for the outlook for energy stocks to improve.
- For more background on the oil price war, see Zernov’s Why Russia Killed the OPEC Deal.
Author: David Jackson
Source: Seeking Alpha: Crude oil bounces, but will that be enough to help energy stocks in 2020?