Oil prices remain under pressure with news on oversupply, potential Fed hike Brent crude has fallen in the past 2 weeks to reach US$43.61/bbl and looks ready to test the August lows of US$42.69/bbl. A combination of continued oversupply in global markets (reflected in the inventory builds reported last week by OPEC and the Department of Energy), the prospect of higher exports from Iran and a stronger USD (due to an anticipated Fed rate hike) have all contributed to weakness in oil prices. Oil and gas equities have been severely impacted, with most oil stocks (other than DLS and OSH) declining over the past month. DLS has outperformed after the company announced a proposed merger with BPT, and OSH share price has been driven by continued speculation regarding a possible increased bid by WPL.
What are the oil stocks pricing in? Balance sheet = bad, M&A potential = good We have back-calculated the oil price required in our valuation to justify the current share prices for each stock under coverage. Our analysis concludes that stocks with high gearing (e.g. ORG and STO) are trading with lower implied oil prices than their peers. We see WPL’s share price reacting negatively to the prospect of a higher bid for OSH, whereas OSH has benefited from this speculation.
And here are the Brent futures out to 2020:
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
Oil prices remain under pressure with news on oversupply, potential Fed hike Brent crude has fallen in the past 2 weeks to reach US$43.61/bbl and looks ready to test the August lows of US$42.69/bbl. A combination of continued oversupply in global markets (reflected in the inventory builds reported last week by OPEC and the Department of Energy), the prospect of higher exports from Iran and a stronger USD (due to an anticipated Fed rate hike) have all contributed to weakness in oil prices. Oil and gas equities have been severely impacted, with most oil stocks (other than DLS and OSH) declining over the past month. DLS has outperformed after the company announced a proposed merger with BPT, and OSH share price has been driven by continued speculation regarding a possible increased bid by WPL.
