Following its admission yesterday that it is now buying oil by telling clients to sell Brent to $105-107 a monther after advising anyone who cares Brent was on its way to $130, today we learn that Goldman is actively dumping its prop, pardon, there we go again, flow, FLOW, inventory of oil equities to idiots, pardon, clients. As to how dropping crude prices and thus collapsing profit margins is beneficial for energy producers, that is one we will long be scratching our heads over.
From Arjun Murti:
Potential SPR release consistent with expectation of tight oil markets: We recommend buying the dip in oil equities.
There is no change to our Attractive coverage view for the integrated oils sector following news on June 23 that the International Energy Agency (IEA) was calling for a 60 million barrel inventory release from strategic petroleum reserves (SPRs) held by member countries. While we recognize that the potential release of SPR-held oil into commercial markets could weigh on oil prices in the near term (e.g., Brent oil prices fell $5/bbl on June 23), we believe the release is consistent with the bullish underlying fundamentals we have expected, including the following points.
- We continue to believe effective OPEC spare capacity is limited, a point reinforced by the IEA’s comment that the SPR release is in part needed to meet summer oil demand—a remarkable admission, in our view.
- We continue to believe that in a world of at least 3.5% global GDP growth, inherent global oil demand growth is likely to exceed non-OPEC supply growth. While there has been recent evidence that global GDP growth is slowing from very high previous levels of 4.5%-5.0%, the SPR release is consistent with our view that global oil demand growth is ahead of available supply growth.
- In our view, the SPR release raises the likelihood of a “soft landing” occurring for global oil demand growth, as greater available oil supply will allow for more current oil demand to be met than would otherwise be the case (essentially by the amount of the SPR release).
Looking back at SPR releases by the United States since 2000, we find that there is not a clear pattern of outperformance or underperformance by the XLE on an absolute basis or relative to the S&P 500, though over the next six months (versus the date of announcement), on average the XLE rose by 3% and outperformed the S&P 500 by 5%. Given our economists’ view that global GDP growth will stay above 4% in 2011 and 2012 combined with our view of limited OPEC spare capacity and insufficient non-OPEC supply growth, we are buyers of the dip in oil equities.
We continue to believe oil equities are discounting about $80-$85/bbl Brent oil, well below current and forecasted levels. Our Buy-rated favorites remain Cenovus Energy, ExxonMobil, Marathon Oil, Occidental Petroleum, OGX, and Suncor Energy as well as CVR Energy (CL) among refiners (Neutral sector view for refiners).