Oil Bulls Have Entirely Disappeared: Goldman Sachs


A November 14th report from Goldman Sachs Portfolio Equity Research points to a near-unanimous agreement among analysts and industry professionals that lower oil prices are here for at least a year or two. Given this reality, Goldman Sachs analyst David J. Kostin and colleagues project that Brent crude prices will remain below $90 through 2016, which is good news for many consumer and retail sectors.

Oil prices down for the count: Consensus

Oil Prices

In the introduction to their report, the GS analysts focused on the current bearishness surrounding oil prices. “We visited portfolio managers in Texas this week and conversations started and ended on the topic of oil. Although still stunned by the ferocity of the sell-off, everyone we met was resigned to the idea that crude prices would remain low for several years. Although we met many Longhorn alumni, we met no Energy bulls.”

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Oil Prices

The Goldman Sachs report lays out three reasons oil prices will remain low over the medium term: (1) growth in non-OPEC production ex North America will outpace demand growth and creating an oversupply situation in the oil market; (2) the size and continued growth of U.S. shale oil production is driving the global crude oil cost curve lower; and (3) OPEC loses its strength as the first-mover swing producer in crude and U.S. shale output takes over this role.

O&G sector capex flat in 2015

Of note, Kostin et al also anticipate capex in the O&G sector to be flat in 2015. They point out that the energy sector has accounted for around 1/3 of the total capex for the S&P 500 index over the last five years. That said, they do expect strong capex spending outside the oil patch to boost overall capex for the S&P 500 by 6% in 2015.

Many consumer and retail sectors will benefit from lower oil prices

Oil Prices

The Goldman analysts note that lower oil prices benefit consumer and retail firms through lower input costs an increased consumer spending. They model that a $10 per barrel move in crude oil (equal to a $0.25/gallon move in gasoline prices) positively impacts consumer discretionary cash flow by 30-40 bps, similar to about 1/3 point blip down in the unemployment rate or 25 bps move up in disposable personal income. They note the consumer and retail sectors likely to benefit and also highlight a number of firms to consider in those sectors in Exhibit 5 above.

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