Is the recent crude oil selloff a sign of a coming crisis in the US energy industry?
A new Citi credit research note on “The coming energy recession” suggests the possibility is there.
That said, the headline is stronger than Citi credit analyst Jason Shoulp’s more nuanced position in the text, which is only slightly bearish.
He suggests the probability of the price of WTI crude could fall lower than $US75 in 2015 is growing due to a jump in US supply and a decline in global demand. He predicts smaller revenues in 2015, writing “…there seems to be a strong possibility that the energy industry might see top line revenue contract by 2-3% in 2015 if current oil prices were to persist, which would mark the first time that revenue has declined since the end of the recession.”
However, he stops short of predicting a credit crisis that sees investment grade bonds fall to junk, and junk bonds go into default.
“For now we’re inclined to move to neutral after previously advocating an overweight, and while admittedly something of a cop out, focus instead on relative value in the wake of such indiscriminate selling,” he said.
Shoulp isn’t alone in wavering. Jeffrey Currie at Goldman Sachs writes that “while looking into 2015 we have sympathy for these medium- to longer-term bearish views that have driven [crude oil] prices lower, we believe it is too much too early.”
Martijn Rats at Morgan Stanley expects prices to recover somewhat. “…recent declines seem to overstate the fundamental weakening. Over the medium term, we see oil prices stabilising at levels above current spot prices.”