Goldman Sachs has downgraded its outlook on the oil sector from Neutral to Cautious in light of the deceleration of oil prices. Downgrades include Linn Energy LLC (NASDAQ: LINE), Murphy Oil Corporation (NYSE: MUR), and Chevron Corporation (NYSE:CVX) among others.
Oil prices began to fall dramatically this summer, bottoming off just shy of $50 a gallon in January. The price of crude oil has been slowly climbing back up since March following estimates that oil supply and demand would balance each other out once again.
However, the sector remains tumultuous and is easily impacted by several factors. Recently, oil prices dropped as a result of record-high oil exports in Saudi Arabia, slow economic growth in Asia, excess capital access, and OPEC’s reluctance to alter production quotas. Coupled with the strong U.S. dollar, these events have had a sizeable impact on oil prices.
Goldman Sachs increased its estimate for Brent crude oil from $52 to $58 for this year. However, Goldman lowered its long-term estimates to $60-$65 between 2016 and 2019, and added that it will fall to $55 in 2020. The long-term bearishness in the oil sector will put “significant pressure” on oil companies, which Goldman warns will “[force] a rethink on dividends.”
Analysts at Goldman Sachs were not surprised by the deceleration in oil prices as they downgraded the entire industry. The firm pointed to a shrinking oil supply in the North Sea and noted, “We find that the global market imbalances are in fact not solved and believe that the rally will prove self-defeating as it undermines the nascent rebalancing.”
Goldman Sachs continued, “Despite the perception of improving fundamentals,” the oil market is “still well oversupplied through 2016.” The firm believes that global oil demand will be filled through U.S. shale, which is “continuing to benefit from efficiency and productivity improvements.”
