Phil Gresh, an energy analyst at J.P. Morgan and member of Barron’s 2020 Energy Roundtable, sees glimmers of hope for long-suffering investors in the beleaguered sector even though things could get worse before they get better.
The energy sector has been a disaster zone this year, as the coronavirus pandemic has decimated global oil demand.
Most oil and gas producers, including the majors, will lose money in 2020 or barely eke out a profit, and most of those still paying dividends will have to borrow to cover the cost, Barron's reported.
However, Barron's reported that the painful steps that energy companies are taking to reduce supply and conserve cash are likely to pay off in higher oil and gas prices over the next two years — and stronger operations and balance sheets for the industry’s survivors.
“For companies to produce oil profitably, Brent needs to trade around $50 a barrel,” Gresh said.
Brent crude was down 30 cents, or 1.1%, at $26.14 early Monday in the oil patch, while U.S. West Texas Intermediate (WTI) crude fell 63 cents, or 3.2%, to $19.15, Reuters reported.
"At some point, the price will recover, but wiping away 25% of global demand won’t help in the short term. We believed in early April that prices had near-term downside risks. However, with demand starting to improve and U.S. exploration and production companies now aggressively shutting production, we should be near the bottom on the oil price, absent a major COVID-19 relapse," he told Barron's.
"Brent crude will struggle to get to $40 a barrel by the end of this year. I think it will be in the $30s. But if you look out two to three years, the price has to be closer to $50 a barrel for the math to work. I expect that demand eventually will recover," he told Barron's.
Gresh offered a handful of energy stocks for investors to consider:
- Valero Energy (VLO)
- Phillips 66 (PSX)
- Chevron (CVX)
- Canadian Natural Resources (CNQ)
- ConocoPhillips /(COP)
While global oil demand is expected to recover modestly from April lows as countries ease some lockdown measures, the glut created over months in storage facilities will loom over the markets, Reuters explained.
"As oil inventories are likely still increasing over the coming weeks, oil prices remain vulnerable to renewed setbacks," said UBS analyst Giovanni Staunovo.
However, Goldman Sachs was more optimistic than before about the rise of oil prices next year due to lower crude production and a partial recovery in oil demand.
The Wall Street bank raised its 2021 forecast for global benchmark Brent to $55.63 per barrel from $52.50 earlier. The bank hiked its estimate for WTI to $51.38 a barrel from $48.50 previously.
Signs that the output cuts may help reduce the supply overhang have emerged with the narrowing of Brent's contango - the market structure in which later-dated prices are higher than prompt supplies.
The six-month spread of Brent futures hit its narrowest in almost a month at a discount of around $6.50, up from a record wide discount of almost $14 in late-March, reflecting decreasing oversupply expectations and making storage for later sale less profitable.
The re-emergence of trade tensions between the United State and China also weighed on prices.
Adding to U.S. President Donald Trump's threat last week to impose tariffs on China, Secretary of State Mike Pompeo said on Sunday there was "a significant amount of evidence" that the new coronavirus emerged from a Chinese laboratory.
"Demand projections have sobered up last week's enthusiasm and this, together with the prospect of new U.S.-China trade tensions, have weighted heavily on prices today," said Rystad's senior oil markets analyst Paola Rodriguez-Masiu.
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