Energy markets have been getting a large share of media coverage and analyst attention for a long time now. And what seems to be the constant in all the time spent examining the energy universe is volatility.
As Nomura’s analysts state the case in a recent note before energy sector earnings start rolling in, energy markets are headed in the right direction now, just not in a straight line. They also said this:
Valuations haven’t particularly mattered for a while, as direction continues to drive sentiment. Fundamentally, though, the market is clearly more comfortable with its understanding of the “supply bubble,” with global demand the key go-forward variable most asked about.
In other words, everyone understands there is too much crude oil both being produced and already in storage. What’s important now is how that excess supply is made to disappear.
Capital spending is expected to fall by another 50% in 2016. Investors are curious about changes here, but Nomura’s analysts say it is too early to look for signs of changes to already announced plans.
With prices around $43 for June WTI delivery and around $46 for January 2017 delivery, hedging is getting some attention again. Some producers hedged 2017 output when crude prices began to rise in March and investors how much production has been hedged at the higher prices.
Rig counts get attention from investors, but Nomura thinks that crude prices need to stabilize in a range of $45 to $55 a barrel before more rigs will be added in North America.
Many producers are also selling assets to raise cash to keep operations going and to meet loan payments. These sales need to be judged individually, but Nomura noted that Marathon’s sale to Merit and recent divestitures by Devon are positive indicators that with rising crude prices, non-core asset sales won’t be viewed as fire sales.
There’s little love for oil field services companies in Nomura’s view: “Improved crude prices not yet likely to translate into higher activity.”
Nomura said it plans to revisit its price target estimates once first-quarter results have been reported.
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