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Downgrades abound as oil analysts turn gloomy on supply glut

LiveMint logoLiveMint 22-06-2017 Alex Nussbaum

New York: Energy analysts are heading for the exits.

A wave of equity analysts downgraded dozens of oil-industry stocks on Wednesday, a day after crude slipped into a bear market, falling more than 20% from its highest close so far in 2017. Analysts took an increasingly pessimistic view of the world’s ability to soak up the global oversupply of petroleum.

“This is like a falling knife—wouldn’t catch it right now,” Amrita Sen, the chief oil analyst at London-based Energy Aspects Ltd, told Bloomberg TV in an interview. “We’ve had people call us and say this is the worst they’ve seen sentiment in 20 or 30 years.”

A decline in gasoline inventories reported on Wednesday by the US energy information administration was not enough to brighten the outlook

New York-based investment bank Seaport Global Securities LLC downgraded 51 explorers and oilfield service providers, including Apache Corp., Continental Resources Inc. and Devon Energy Corp., in a note that warned crude could plunge below $30 a barrel next year. Barclays Plc and Morgan Stanley, meanwhile, slashed estimates for Schlumberger Ltd and the rest of the services sector, citing the potential for as much as a 50% drop in stock values.

Big Oil wasn’t spared either. Analysts at Macquarie Capital Ltd in London cut ratings for Royal Dutch Shell Plc, Chevron Corp., Eni SpA and BP Plc, warning the companies may require “further, painful cost reductions” if prices keep slipping. Capital One Securities analysts downgraded Hess Corp. and three other exploration and production companies.

A decline in gasoline inventories reported Wednesday by the US energy information administration wasn’t enough to brighten the outlook. West Texas Intermediate oil futures settled at $42.53, down 2.3% for the day in New York trading. Brent crude, the global benchmark, sank below $45 a barrel for the first time since November.

The S&P 500 Energy Index slipped 1.6% and was off 15% for the year.

At Seaport Global, analysts led by Mike Kelly said crude prices need to fall to $40 a barrel to force production cuts that would stabilize supply and demand. If not, the market faces as much as a 2.2 million barrel a day surplus next year that will only get worse through 2020, Kelly’s team wrote.

Market in balance

“Something has to give to keep the market in balance,” the analysts said. Per-barrel prices may fall back into the $20s early next year and average $35 a barrel in the first half of 2018, prompting “massive” cuts in US drilling rigs, they said.

In New York, Morgan Stanley analyst Ole Storer downgraded nine service providers including Nabors Industries Ltd, given the “increasing odds of a bear case scenario.”

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“It is now consensus that global oil markets will swing into surplus in 2018, and the burden of proof that this will not happen lies with the bulls,” Storer wrote. Bloomberg

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