Pricing woes seem far from over and the gloomy outlook for the energy sector continues as crude oil projections are slashed further.
Bearish on Oil
A week after Citigroup (C) lowered its 2015 and 2016 crude oil projections, Goldman Sachs (GS) also followed suit. The firm believes that crude prices should remain low for a long period in order to ease out the supply glut.
Goldman reduced its three-month price forecast for West Texas Intermediate (“WTI”) to $41 per barrel from $70 and Brent crude price forecast to $42 per barrel from $80. For six-months, WTI price forecasts have dropped to $39 from $75.
Moreover, the investment management firm slashed full year 2015 estimates for WTI and Brent to $47.15 and $50.40 from $73.75 and $83.75 respectively. For 2016, the firm expects WTI at $65, down from $80 and Brent at $70, down from $90.
The firm expects that with the current credit, equity and oil price mix (some of the market levers) the excess supply should balance out by 2016.
Société Générale, a French multinational banking and financial services company, also lowered 2015 WTI price forecasts to $51 per barrel and Brent to $55 per barrel.
Following the projection cuts, WTI crude fell about 5% to $46 per barrel, nearly a six-year low. Brent crude also fell nearly 6% to about $47. WTI has fallen over 50% and Brent over 60% since Jun 2014 and most analysts have given up determining a bottom.
House of Saud Remains Unbothered
In an attempt to maintain its market share, Saudi Arabia – the largest exporter in the apex body of the international cartel of oil producers, OPEC – continues to deter the decision to lower production. On the contrary, to increase its foothold in the U.S. market, Saudi Aramco, the state oil firm, had lowered crude’s selling price to Northwest Europe by $1.50 for February, the fifth consecutive monthly cut.
Measures Taken Insufficient in Near-Term
The oil price slide continues even though several firms are lowering capex to rein in the rising production. Overall upstream spending in the U.S. is down 25%. Earlier, the time gap between the capital spending and resultant production was sufficiently large.
However, with shale output, capital outlay has been translating into production much faster. As such this cut in capex must be sustained for a longer period and Goldman expects WTI trading around $40 per barrel for the first half of the year should help in keeping capex in check.
Several energy companies are also cutting back drilling activities as a more immediate measure. A sharp decline in rig count is suggestive of this. Per Goldman analysts drilling activity has fallen more quickly than prior bear markets.
Per Baker Hughes’ (BHI) recent report, rigs engaged in exploration and production worldwide totaled 1,313 in Dec 2014. This was down 11 from 1,324 counted in Nov 2014, and down 22 from 1,335 in Dec 2013. (Read More: Worldwide December Rig Count Falls Sequentially)
Offshore Drillers and Oilfield Service Firms to See More Trouble Ahead
With oil prices plummeting, several offshore drilling companies have experienced trouble. As upstream firms cut exploration budget such drillers may find it hard to acquire new contracts, which is the key revenue generation avenue for them. Moreover, the companies with ageing rigs and low contract backlog may find it more difficult to sustain this weakness.
The oilfield services firms are also expected to experience a decline in revenues as their profitability is linked to drilling activities.
Keeping with this view of an imbalance existing in the supply/demand market, several such comapnies are expected to witness a decline in the upcoming quarters. Downgrades and lower price targets come from Goldman for offshore players like Transocean (RIG), Diamond Offshore (DO) and oilfield services firms like Schlumberger (SLB) and Oceaneering (OII).
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