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US energy shares affected by crash in oil price

Precise takes a look at how US energy shares have been affected by the recent plummet in oil prices.

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As the New York stock exchange market bell rang this morning, traders will have wondered if this week will see a continued rally in US stock prices after last week’s rebound in energy shares. It was a welcome end to a tough start to the year, after the S&P 500 posted its first back to back weekly retreats since October.

It’s been, as Fortune magazine reported, a “pretty rough six month stretch for the energy industry.” Indeed it has – just look at what’s happened to two of the world’s largest – Exxon Mobil and Chevron. Combine the losses they’ve faced and you get a mighty $95 billion reduction in market share.

Since July, 22 out of the 24 oil, gas and coal producers in the Fortune 500 have seen their stock price decline. Add it all up, and it comes to $263 billion. ConocoPhillips and Occidental Petroleum finished behind Exxon and Chevron, with more than $20 billion shaved off each of their respective market caps during the period – a 26% decline.

However some analysts were seeing signs of confidence in the market at the close of last week. Energy stocks went up by 2.3% as crude oil prices rose too. After the International Energy Agency forecast that the market downtrend would end, brent went up too – more than 1.8% to $49.14 a barrel. Tim Ghriskey at Solaris Group in New York said as crude prices have gone up for a couple of days, “there is a belief we have put in a bottom.” Mark Luschono at Janney Montgomery Scott said the market was emboldened by a strong consumer confidence report. “(It) seemed to turn the market right around. Along with that came sturdier oil prices, and I think that’s the elixir for ultimately better equity prices … dampening concern that low oil prices are a reflection of weak demand.”

But there is no getting away from the big problem of global overcapacity. Granted the US laid 61 rigs last week – the highest number since 2009 – and some drillers are already paying early termination fees to companies involved in their E&P, but unless OPEC makes a move the glut will continue to rise and prices will continue to fall. Oppenheimer’s Fadel Gheit told CNBC, “I am not ruling out $40 oil but I think we are very close to the bottom if not we are at the bottom. I don’t think oil prices below $50 will be sustainable, but I also did not think that oil prices above $100 were sustainable either.” Indeed last week Bank of America Merrill Lynch analysts forecast Brent oil hitting $31 a barrel by the end of Q1, a figure not seen since 2004. BofA dropped its 2015 average forecast prices for Brent from £77 a barrel to $52; and into 2016 it’s only raising them slightly – to $58 a barrel.

Analysts say only two things can realistically improve the situation – either OPEC steps in to cut production or the global economy enjoys a significant boost in fortunes. But if you were counting on either of those you’ll be sorely disappointed. On Sunday, Iraq’s Oil Minister boasted that his country pumped the most oil it has ever done in a single month (4 million barrels a day) thanks to higher output from its southern terminals and a surge in supply from the north. And if you thought, “Ah, but there’s the resurgence in the world’s economy left to save us’, don’t read on.. Tomorrow (Thursday) China is expected to report it’s growth has slowed a whopping 7.2% since last year, the weakest since the depths of the last global economic crisis. I told you not to read on...