Analysts: New Price Downfall Not Sustainable
With both the U.S. and global benchmarks for oil prices hitting fresh six-year lows, analysts are scrambling to figure out where the slide will end.
In Monday morning trading, Brent was trading at $43 per barrel and North America’s benchmark, West Texas Intermediate (WTI) was at $39 per barrel. Analysts at Tudor Pickering Holt & Co. in Houston said in their daily note to investors that it’s hard to buy energy stocks with oil prices dropping almost every day at a drip-drip-drip pace.
“With oil down again, $20 per barrel predictions will be amplified,” TPH said. “Remember the oil business doesn’t work at these prices.”
At Robert W. Baird & Co. in Ohio, analysts said global risks are among the forces working to push West Texas Intermediate below $40 per barrel. The sell-off in global equities witnessed in the last three trading sessions extended overnight, punctuated by an 8.5 percent drop in the Shanghai Composite, Baird analyst Ethan Bellamy wrote. With Asian and European equity indices generally 3 to 5 percent lower Monday and the S&P 500 futures that have fallen 3.2 percent to 1,907, it’s compounding last week's retreat. What’s more, he said, firming bids to G7 sovereign bonds that have pushed the U.S. 10-year Treasury yield 6 basis points lower to 1.98 percent and continued flight from emerging market currencies reinforce the apprehensive tone of cross-asset trading.
“Against this backdrop, WTI has withered … Brent has declined … and natural gas is weaker,” he wrote. “Until this broader liquidation in risk can be arrested, expect the energy group to remain under pressure.”
And at Raymond James & Associates in Houston, analysts noted the global oil economy hasn’t perked up the way many had expected.
“With our recent downward revision in 2015/2016 oil prices and U.S. [exploration and production] cash flows, we now think the U.S. drilling recovery is likely to be much slower than previously forecasted.”
As for rig count, RayJa expects the 2016 average U.S. rig count to be down about 57 rigs. In conjunction with that, they said, a reduction in forecasted active rigs means that U.S. oilfield earnings estimates are coming down.
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