Investors nervous as oil prices and energy stocks continue to decline
Oil and gas investors hoping for a recovery on Monday would have no such luck. Prices for crude continued to drop as trading concluded on October 13, 2014, and WTI flirted with the $85.00 mark while Brent dropped another 2% to end at $88.11.
Energy stocks fell again, faring the worst of any sectors in the S&P 500. The drop by the S&P 500 last week was the sharpest since 2012, according to a note from Baird. KLR Group had a similarly bleak outlook, cutting its long term oil price forecast by $5.
“To maintain current oil-directed activity, we believe the U.S. needs $90+ NYMEX oil,” said the KLR Morning Brief report on Monday. “Assuming NYMEX ~$92.50 oil/~$4 gas next year, the E&P sector is ~50% FCF negative. In a ~$80 NYMEX environment, should Saudi act punitively and maintain current output, the U.S. oil rig count could potentially fall ~30%. Given an ~$80 NYMEX environment and assuming a ~1,100 U.S. oil rig count by early ’16, U.S. oil production likely evidences modest erosion after ’15.”
Just how bad were energy stocks hit last week? The chart above is taken from EnerCom’s E&P Weekly consisting of 85 companies. In the weeklong time period, total market capitalizations dropped to 85-company median of $1,515 million from $1,854 million the week before – a drop of 18.3%.
Oilservice companies, predictably, also felt the impact from a difficult week. The median market cap of 59 companies in EnerCom’s OilService weekly fell to $1,208 million from $1,288 million week-over-week (6.3%).
Early indications are the decline in oil prices will not be short-lived. Reuters reports Saudi Arabia has quietly implemented a “price war” by dropping the price of Brent in order to sustain long-term prospects of $100 a barrel. In a sense, Saudi Arabia is beating its competitors to the punch in a bullish oil market by cutting prices in an attempt to slow the hydrocarbon growth of rival countries. Some news sources report the Saudis are comfortable with cutting the price to as low as $80 per barrel and have refused to restrict production rates, despite the pleas of fellow OPEC members. The Organization is in “discord,” according to The Wall Street Journal, and Venezuela has openly called on Saudi Arabia to raise oil prices because $80 oil is uneconomical to the South American country. Iran and Libya are also producing at yearly highs but are not overly benefiting because of the Saudi’s price cut.
Forbes reports United States E&Ps still run in the black for $80 oil in major plays.
In an exclusive interview with Oil & Gas 360® on Oct. 10, Baird energy research group members said they believed the major basins could produce oil economically at $75 per barrel.
Oil at $70 per barrel, on the other hand, would force companies to dial back production by as much as 33%, says a report from Credit Suisse.
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