Goldman Sachs Forecasts Rebound For Oil Stocks

Goldman Sachs Forecasts Rebound For Oil Stocks

almost 4 years ago2 mins

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As the price of oil tumbled to historic lows this week, burning some investors’ fingers, Goldman Sachs responded to calls for clarity with a few predictions for the future of the industry… 🔮

What does this mean?

While collapsing demand combined with a technical quirk to briefly send US oil negative on Monday, prices on both sides of the Atlantic remain below $20 a barrel – adding urgency to questions about the effect on related companies.

Coronavirus lockdown means road traffic is currently well below normal levels, reducing oil demand
Coronavirus lockdown means road traffic is currently well below normal levels, reducing oil demand

While Big Oil stock prices may have stabilized for now, investment bank Goldman believes – based on previous oil price downturns – that a sustained recovery will depend on the price of oil itself rising, which it doesn’t expect until the third quarter of 2020 📆

While Goldman predicts relatively low debt levels will allow oil producers to preserve their 30-year streak of maintaining investor dividends for now, more cost-cutting will likely be needed. And in the long term, an oil price of at least $40 a barrel will be required to ensure the industry stays viable…

Why should I care?

Intriguingly, Goldman concludes that while recent oil production cuts were too small to have any immediate impact, their duration could lead to a sharp rebound in oil’s price once demand starts to recover. And that may in turn drive outperformance in major oil companies' stock prices – especially given recent decarbonization pressures have reduced long-term investment in production 👍

Oil exploration and production is cheaper in OPEC economies, but they also require higher prices
Oil exploration and production is cheaper in OPEC economies, but they also require higher prices

Finimizers interested in learning more may like to check out our Pack on Investing In Oil & Gas.

A word of warning, however: USO, the largest oil exchange-traded fund, saw its size double this year and increase 17% in the past week alone, apparently due in part to retail investors betting on oil's price recovering. But the fund’s value fell 30% on Tuesday, and the mechanics of its setup mean any future returns will fail to match actual oil price gains. Targeting oil company stocks may well be an easier way to invest in the sector…

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