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Following its admission yesterday that it is now buying oil (NYSE:USO) by telling clients to sell Brent to $105-107 a monther after advising anyone who cares Brent was on its way to $130, today we learn that Goldman Sachs (NYSE:GS) is actively dumping its prop, pardon, there we go again, flow, FLOW, inventory of oil equities to idiots, pardon, clients. As to how dropping crude prices and thus collapsing profit margins is beneficial for energy producers, that is one we will long be scratching our heads over.
From Arjun Murti:
Potential SPR release consistent with expectation of tight oil markets: We recommend buying the dip in oil equities.
There is no change to our Attractive coverage view for the integrated oils sector following news on June 23 that the International Energy Agency (IEA) was calling for a 60 million barrel inventory release from strategic petroleum reserves (SPRs) held by member countries. While we recognize that the potential release of SPR-held oil into commercial markets could weigh on oil prices in the near term (e.g., Brent oil prices fell $5/bbl on June 23), we believe the release is consistent with the bullish underlying fundamentals we have expected, including the following points.
Looking back at SPR releases by the United States since 2000, we find that there is not a clear pattern of outperformance or underperformance by the XLE (NYSE:XLE) on an absolute basis or relative to the S&P 500 (NYSE:SPY), though over the next six months (versus the date of announcement), on average the XLE rose by 3% and outperformed the S&P 500 by 5%. Given our economists’ view that global GDP growth will stay above 4% in 2011 and 2012 combined with our view of limited OPEC spare capacity and insufficient non-OPEC supply growth, we are buyers of the dip in oil equities.
We continue to believe oil equities are discounting about $80-$85/bbl Brent oil, well below current and forecasted levels. Our Buy-rated favorites remain Cenovus Energy (NYSE:CVE), ExxonMobil (NYSE:XOM), Marathon Oil (NYSE:MRO), Occidental Petroleum (NYSE:OXY), OGX, and Suncor Energy (NYSE:SU) as well as CVR Energy (NYSE:CVI) among refiners (Neutral sector view for refiners).
Tyler Durden is the founder of Zero Hedge.
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