A January 16th article from Oppenheimer Equity Research argues that oil prices are not sustainable at their current sub-$50 levels, but that that it could take several months (or quarters) before prices make a real move back up again.
2014 was a disaster for the energy sector
The Oppenheimer report highlights that 2014 was the worst year for energy stocks since 2008. Crude oil price were down 48% from a high of $106 a barrel in June to $55 a barrel in December. Oil prices have continued to drop in 2015, down 13% already year to date as of 1/15.
Energy stocks have also been pummeled over the last few months. Relative to their year-highs, O&G majors are down 29% on average, the largest independent refiners are down 28%, large E&P firms have slipped 37% and small E&Ps are off a painful 52%. Also of note, pure gas plays are down by more than 40%, while WTI has slipped by 56%.
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Oppenheimer analysts Fadel Gheit and Luis Amadeo note that bottom-fishing strategies have also failed, as the majors are down 20%, refiners are down 19%, large E&Ps off 28% and small E&Ps plunged 44% over the last quarter.
Gheit and Amadeo also point out that current bets on futures contracts suggest that oil prices could yet drop below $40. A number of analysts believe prices could remain low for years, and others (including the authors) think oil prices have hit bottom and will probably bounce back to at least $65 in 2015.
They also, however, urge caution in trying to predict future oil prices. “After 30 years’ covering the oil industry, we believe oil prices are un-forecastable as they are driven by many un-quantifiable factors, such as geopolitics, speculation and market manipulation. We believe crude oil prices above $80 or below $60 are unsustainable. Higher prices slow demand growth and increase energy investments, while lower prices stimulate demand, stifle supply growth, and slow investment in alternative energy projects. Improved drilling and completion technology, and better government polices, should lower marginal production cost in North America, maintain production growth, and reduce price volatility.”
Oil prices driven by speculation
The Oppenheimer analysts unequivocally state their belief that the price of oil is manipulated by speculators, and, moreover that this manipulation is not in the best interests of the U.S.. “We believe that oil prices can be manipulated with financial speculation directly responsible for most of the price movement above $80 and below $60. Unfortunately without tougher government regulation, speculation will continue to drive volatility, which could be detrimental to US energy security.”