Energy Business

Goldman Sachs Makes Major Ratings Changes to Its Oil Outlook for Stocks and Prices

RPC Inc. (NYSE: RES) was downgraded to Neutral from Buy, but the price target was raised to $15 from $14, after closing at $14.25.

Summit Midstream Partners L.P. (NYSE: SMLP) was downgraded to Neutral from Buy and the price target was lowered to $16.00 (versus a $14.88 close).

Western Gas Equity Partners L.P. (NYSE: WGP) was downgraded to Neutral from Buy with a $34 price target (versus a $31.28 close).

Below is the summary so investors can see exactly what Goldman Sachs was saying here in its outlook for oil prices ahead.

The good: ‘green shoots’ of rebalancing
After an 18-month wait, and thanks to a $32/bbl average oil price ytd, non-OPEC producer guidance is finally pointing to declines, helped in the short term by a rise in disruptions. As we do not expect growth from OPEC & Russia after 2Q16 and given our expectation for resilient demand growth, our confidence that stocks will draw in 2016 if prices remain low is rising.

The bad: premature price recovery
The lack of a supply response in 2015 has shifted over the past month into consensus expectations for broad-based supply declines in 2016. This adjustment is only just starting however and sustained low prices are necessary in our view to maintain a sufficient level of financial stress to finish this rebalancing process, especially as funding markets have yet to shut. This is why an early rally in prices before a deficit materializes would prove self-defeating, as it would reverse these nascent supply curtailments.

The ugly: risks of saturation still high
While supply responses and US stock draws on the horizon suggest price lows may have been set, the risk that US storage saturation pushes prices sharply lower in coming weeks remains high in our view. Current US inventory builds are setting new record highs for storage utilization and we expect these builds to continue through April. Further, the risk of petroleum product storage saturation pushing refinery runs lower in the face of strong imports could more than offset US production declines.

Still a trendless and volatile market
We believe that storage constraints and a still large oversupply in coming months will continue to keep prices in a trendless and volatile range. We expect this range to rise to $25/bbl to $45/bbl in 2Q16 – up from $20/bbl to $40/bbl in 1Q – given the friction associated with undoing the supply green shoots and with the odds of hitting storage capacity diminishing as time passes. From our 2Q16 WTI price forecast of $35/bbl, we continue to expect that the subsequent price recovery will only be gradual to match the pace of inventory draws with our 3Q16 and 4Q16 WTI price forecast at $40/bbl. We only expect US shale growth to be required in 2017, leading us to forecast prices of $55-60/bbl in 2017.

Again, this is not a straight up to the moon call for oil and oil stocks. There are many caveats, and there were many analyst downgrades for the sector stocks as well.

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