Following the announcement by OPEC last night to keep output unchanged, the price of Brent crude continued to slump further to its lowest in four years at $72/bbl and WTI at $68/bbl.
Prior to the OPEC meeting, many market watchers were already expecting a marginal or no cut in production levels, given that OPEC is likely to take the strategic decision of seeking to maintain its market share in the face of rising US shale oil production. But with this official decision by OPEC, oil prices are likely to settle lower, impacting producers on the margin and reducing spending for projects that become uneconomic at the upper end of the cost curve.
Lower capital expenditure is expected to be seen in oil sands projects, certain US shale oil projects and certain deepwater and Gulf of Mexico/North Sea projects. The latter would translate to slower order flows for oil and gas related plays, hence we would favour companies with strong balance sheets and good track records to weather this downturn.
Given the still positive long term fundamentals, we maintain our NEUTRAL rating on the oil and gas sector, but more downside could be seen in the near term in light of macro developments.
No comments:
Post a Comment