Our valuation shows Santos and Oil Search (OSH) are more leveraged to oil price movement, but the sheer size of the fall in the Santos share price, in particular, relative to the oil price decline looks excessive in our view.
The following chart summarises the implied oil price for stocks under coverage relative to the closing share prices on 8th December. Although OSH’s implied oil price has fallen from US$68/bbl yesterday to US$63.18/bbl today, it still remains at a premium to other stocks in the sector, implying that on a relative basis at least there could be further downside ahead.
Overall, the macro environment will be the biggest driver of share price from here; with OPEC not providing any assistance we expect the market will remain physically oversupplied with oil until late 2016, based on our view of oil demand growth and expected decline in conventional oil supplies next year.
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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.
Our valuation shows Santos and Oil Search (OSH) are more leveraged to oil price movement, but the sheer size of the fall in the Santos share price, in particular, relative to the oil price decline looks excessive in our view.
