After enjoying a big, three-day rally, oil tumbled Tuesday and several energy pros don’t see things getting better anytime soon. U.S. crude closed down 7.7 percent lower at $45.41 a barrel Tuesday, after China’s official Purchasing Managers’ Index (PMI) dropped to 49.7 in August from 50.0 in July. The data reinforced fears about slowing growth and global demand for petroleum.
The price plunge followed an 8.8 percent move higher Monday.
Brent was last down 9.2 percent, or $4.98, at $49.17.
Randy Ollenberger, managing director of oil and gas at BMO Capital Markets, thinks crude will find a bottom somewhere in the $30s. On the other end, he doesn’t think it will go above the $50 mark anytime soon.
“We’re not out of the woods yet. We’ve got physically way too much oil on the market, whether it’s in inventories or supply currently being pumped and now the demand side of the equation looks like it is stumbling a little bit with the bad news coming out of China,” he said in an interview Tuesday with CNBC’s “Power Lunch.”
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Kyle Cooper, director of research for IAF Advisors, also sees more weakness ahead, thanks to relatively high maintenance season for refineries this year. That means more oil will go into storage.
“I think we are in store for some large crude builds here in the next few weeks,” he said. “Now, that also means that product stocks will probably fall because while they are using less crude, they are clearly not putting out as much gasoline.”
He believes the reasons for Monday’s rally were twofold: a report that suggested OPEC may be willing to talk to non-OPEC producers about curbing output, as well as U.S. Energy Information Administration (EIA) data that showed a drop in oil production.
However, internal numbers also show oil producers actually increased their June stocks, said Cooper.
“That says that they might have lowered … supply but demand was also lower, too, if crude stocks were actually higher then they originally estimated.”
Ken Sill, oil services analyst for Global Hunter Securities, believes many U.S. E&P companies won’t be able to withstand low prices over the next several months.
“It’s pretty clear that most of the world doesn’t work at this oil price and you can’t sustain production,” he said. “The Saudis can do it and a few of the better-positioned North American producers but globally the deep water doesn’t work, oil sands don’t work. There’s just too much oil that doesn’t work at this price, for this price to be here for a long time.”
For those worried about further weakness, Sill advises owning Schlumberger. He likes C&J Energy Services and Superior Energy Services for those willing to buy with a longer horizon on a rebound in oil. Meanwhile, Halliburton is a bit of a mix, he said, calling it a large-cap, liquid name that is somewhat in limbo with its pending acquisition of Baker Hughes.
Source: CNBC
