If shale is so good then why are the oil stocks so bad? Downgrades across the energy sector raise real questions about the ability of shale producers to operate with prices in the low $40s per barrel. It also questions the perception that shale operators have become so efficient that they can operate at almost any price. While the downgrades are coming fast and furious, it is probably a sign that the market has bottomed out.
Crude oil prices have plunged far below what the oil fundamentals might suggest and even hardened bears are starting to question this selling madness. The price drops and current levels will destroy the myth that U.S. oil production will rise regardless of the price and we are already seeing downgrades of those energy stocks across the sector. Downgrades are coming fast and furiously. Barron’s reported that Seaport Global Securities downgraded 51 energy-related stocks in the exploration and production arena, as well as offshore spa
Crude oil’s ongoing oversupply woes reached an ear-piercing crescendo during Tuesday’s trading session as WTI crude plunged into a bear market after growing signs of rising production across the globe. WTI Crude was already extremely sensitive and vulnerable to losses amid the bearish sentiment with reports of an unexpected supply increase by Libya sending prices below $43.
Crude oil traders piled onto the downside driving oil into bear market territory in a July crude oil future expiration selloff that will be one to remember. The market is still struggling and not even the fact that we have Tropical Strom Cindy pulling into refinery row, a major political shake up in Saudi Arabia and the fact that we are already seeing shale oil producers start to feel the pain of lower oil prices seems to be helping. We also saw supportive data from the American Petroleum Institute (API) for oil but with the mood as bad as it is, it didn’t do much to elevate prices.
Six weeks ago, we took a deep dive into the absolute and relative performance of the S&P 500's energy sector. At that point, we concluded that, "[w]ith this year's breakdown from the 2016's "bearish flag" pattern, the long-term underperformance of energy stocks could carry over through 2017 and beyond." Updating the relative performance chart from that early May piece suggests that, if anything, the outlook for energy stocks has worsened with the latest drop in oil prices.
July crude oil futures go away today and it will be up to the August crude futures to find a bottom. As U.S. oil production is showing signs of faltering (up only 12,000 barrels in June as opposed to an expectation of 120,000 barrels) and seeing we are past the pain of many shale producers, U.S. rig counts will slow in coming weeks and we may see the count start to fall. Maybe that is why Saudi Arabia is not so worried about the uptick in oil production from Nigeria and Libya.