Negative sentiment has weighed on oil equities even as oil prices have moved higher over the course of the year, but barring a recession, slowing productivity gains among U.S. producers and lower capital spending may improve sentiment in 2020, analysts say.
On a year-to-date basis, Brent and West Texas Intermediate crude oil prices are up 16.0% and 20.5%, respectively, but oil producer equities have underperformed the broader market, with the S&P 500 Oil & Gas Exploration & Production index down 4.9% through Oct. 11 against an 18.5% gain for the S&P 500.
"We see a potential inflection in equity sentiment in 2020 ahead of [an] improved fundamental oil supply-demand outlook in 2021," Goldman Sachs analysts wrote in an Oct. 14 report. The analysts said lower capex has investors captivated by the risks of lower top-line growth rather than "the potential" growth in free cash flow from a rebound in oil prices that might come from the reduced spending.
Investor demands for capital restraint may also bring about a shift in OPEC's role on the global market, the analysts said. "Investors, in our view, are focused on the downside risks to 2020 oil prices and are not focused on a post-2020 supply-demand inflection to a multi-year period where OPEC growth is needed from a multi-year period where OPEC declines were needed," the Goldman Sachs analysts wrote.
The analysts expect negative sentiment will likely weigh on oil equities "until we see greater confidence in a runway for OPEC to increase production" without pushing Brent prices below $60 per barrel.
Raymond James analysts said Oct. 14 that they expect U.S. supply growth will be approximately 430,000 barrels per day in 2020, almost 1 million barrels per day lower than consensus. Together with "modestly lower" than expected oil demand growth this year and an estimated 150-million-barrel hit in the second half of 2019 to Saudi oil supply from a September attack on their infrastructure, "the sum of these supply demand changes actually leaves our supply/demand balance more bullish than it was in July," the analysts said. Even so, Raymond James lowered its 2020 oil price estimates "to accommodate the recent bearish price reaction and overall market pessimism."
"It is important to note that our new 2020 forecasts are 30% to 40% above the current futures strip, while our long-term price assumptions are nearly 50% above the strip," the analysts said.