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Oil market volatility could leave generalists 'sidelined from the energy sector'

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Oil market volatility could leave generalists 'sidelined from the energy sector'

The apparent short-term nature of the disruption to global oil supplies stemming from an attack on Saudi Arabia's crude oil infrastructure could leave some investors reluctant to put their money into oil and gas stocks.

Oil prices sank on reports that Saudi Arabia was using its abundant stockpiles to minimize the shock to oil markets as it worked to resume production more quickly than the market expected, leading oil and gas stocks to reverse course.

"Not two hours after we released a note showing Saudi production averaging 7.8 [million barrels per day] in Q4, we had to re-set our numbers, to the point where the impact broadly will be limited to Q3 2019," Mizuho analyst Paul Sankey wrote Sept. 19, outlining the "huge assumptions" that Saudi Arabia was not being "overly positive in its spin for market credibility reasons," that there are no military retaliations that further disrupt oil supply, and the event does not wind up eroding demand.

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Mechanisms to balance the market from a supply disruption include higher production from other producers, inventory drawdowns, and reduced demand from slowing economic growth and price elasticities, Goldman Sachs analysts explained in a Sept. 17 report. "We reiterate our view that the global oil market has enough resources available … to balance a larger outage without requiring an [strategic petroleum reserve] release [from developed countries] (which remains a significant additional buffer to balance the market.) This reinforces our view that [Brent] prices are likely to remain below $75/bbl … even if the outage proves much more persistent than current guidance."

"It's hard for equity investors to capitalize [on] a short-term event of this nature, and given ramping non-OPEC volumes in the Q4'19 and a market that remains fundamentally oversupplied in 2020 …, the fade the rally mentality continues to gain traction absent further disruptions," Tudor Pickering Holt & Co. analysts wrote Sept. 18. "Overall, as long as we see this heightened volatility arising from escalating geopolitical risk along with 2020 oversupply / weak demand problems, generalists are likely to remain sidelined from the energy sector."