In Oil & Companies News 19/08/2016
Energy investors appear to be getting ahead of themselves, judging by the premium energy stocks are demanding over the price of oil.
While U.S. crude is down by more than 10 percent from its highest close this year on June 8, the S&P 500 Energy Index is off less than 1 percent since, and the S&P/TSX Energy Index of Canadian producers has gained 3.8 percent. The disconnect implies, unless oil prices are set to rise sharply, equities are overpriced.
“Oil prices are telling you it’s not good and yet equity investors are finding all kinds of different reasons to stay in the stocks,” Martin Pelletier, managing director and fund manager at TriVest Wealth Counsel in Calgary, said in a phone interview. His firm closed its energy fund a month ago after the spring oil rally and has taken its clients’ individual energy holdings almost to zero, he said. “The upside is less than the downside risk.”
Crude has fluctuated on mixed signals since declining more than 20 percent into a bear market and closing below $40 a barrel in the first week of August. A rise in drilling rigs in the U.S., heading into a period of seasonal demand weakness, is fomenting negative sentiment that a supply glut will persist, while indications Saudi Arabia is prepared to discuss stabilizing markets are supporting prices.
The two-year rout in crude has eroded cash flow for producers globally, forcing them to shelve drilling, cut workers and squeeze costs to survive. The most recent quarterly results for North American energy companies shows 84 percent had lower revenues than a year ago.
Source: Bloomberg
