Why Oil Prices Are Falling Despite Falling Inventories

Oil prices have recently lost their forward momentum, with Brent crude and WTI plunging this week. A rather disconcerting trend is observed in the oil markets: there is a big disconnect between inventory data and oil prices.

Crude oil inventories fell below the five-year average for the first time this year. Last week, implied demand for gasoline rose 992,000 barrels per day (mb/d) w/w to a 15-month high of 9.511 mb/d, taking the rise from the start of the month. Despite this positive inventory data, WTI Price fell from $83.26 a barrel on April 12 to $68.85 on May 3 while Brent price fell from $87.33 to $72.54 per barrel during the period.

Normally, US stocks and oil prices have a strong inverse relationship, with falling stocks pushing prices higher while rising stocks have the opposite effect. However, heavy drawdowns on inventory over the past couple of weeks have failed to prevent a significant drop in prices. As Standard Chartered commodity analysts have noted, these upheavals tend to be temporary and come at times when prices are primarily driven by other oil market fundamentals, expectations, asset markets more broad and financial flows. In this case, recent optimism about OPEC+ production cuts has failed to counter demand concerns related to a weakened economic backdrop and a hawkish Federal Reserve leading to oil prices remaining in a fork. Additionally, there are reports that Russian crude shipments remain strong despite sanctions and embargoes: Reuters reported that April oil shipments from Russia’s western ports are on track to reach their highest level since 2019 at more than 2.4 million barrels/day.

Source: Standard Accredited Research

Fortunately, part of Wall Street still thinks the energy sector is still good for the long term.

Goldman Sachs advised investors to buy energy and mining stocks, saying both sectors are well positioned to benefit from economic growth in China. The GS commodity strategist has forecast Brent and WTI crude oil to climb 23% and trade near $100 and $95 a barrel over the next 12 months of trading, a prospect that supports their view at the stock market. rising profits in the energy sector.

Energy is trading at a discounted valuation and remains our preferred cyclical overweight.the investment bank said in a note to clients.

Indeed, energy stocks remain really cheap, both in absolute and historical terms.

The energy sector is the least expensive of the 11 sectors of the American market, with a current PE report of 6.7. In comparison, the second cheapest sector is basic materials with a PE value of 10.6, while financials is the third cheapest with a PE value of 14.1. For some perspective, the S&P 500 average P/E ratio currently sits at 22.2. So we can see that oil and gas stocks are still very cheap even after last year’s massive run, thanks in large part to years of underperformance.

Rosenberg analyzed PE ratios per energy stock by looking at historical data since 1990 and found that on average, the sector historically ranks in only its 27th percentile. On the other hand, the S&P500 is in its 71st percentile despite last year’s massive sell-off.

Even better, the outlook for the energy sector remains bright. According to a Moody’s Research Reportsector profits will broadly stabilize in 2023, although slightly below the levels reached in 2022.

Analysts note that commodity prices have fallen from very high levels at the start of 2022, but predicted that prices are likely to remain cyclically high through 2023. This, combined with modest volume growth, will support a strong cash flow generation for oil and gas producers. . Moody’s estimates that U.S. energy sector EBITDA for 2022 will reach $623 billion, but will fall to $585 billion in 2023.

Analysts say weak capital spending, growing uncertainty about future supply expansion and the high geopolitical risk premium will, however, continue to support cyclically high oil prices.

In other words, there’s simply no better place for people investing in the US stock market to park their money if they’re looking for serious earnings growth..

Market deficit

But the main reason to be optimistic about the sector is that the current oil surplus is likely to turn into a deficit as quarters go by.

Oil prices have only stagnated since the big initial gains from the shock news, as global demand concerns and recession risks continue to weigh on oil markets. Indeed, oil prices barely budged, even after EIA data showed US crude inventories dwindled, while Saudi Arabia will raise its official selling prices for all oil sales. to Asian customers from May.

But StanChart predicted that the OPEC+ cuts will eventually eliminate the surplus that had accumulated in global oil markets. According to analysts, a large oil surplus began to build up at the end of 2022 and spread to the first quarter of the current year. Analysts estimate that current oil inventories are 200 million barrels higher than at the start of 2022 and 268 million barrels higher than the June 2022 low.

However, they are now optimistic that the construction in the last two quarters will be gone by November if the cuts are sustained throughout the year. In a slightly less bullish scenario, the same will be realized by the end of the year if the current cuts are reversed around October.

By Alex Kimani for Oilprice.com

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