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Oil Stocks Collapse as Goldman Sachs Warns of $20 Crude

Last Updated September 23, 2020 1:38 PM
Mark Emem
Last Updated September 23, 2020 1:38 PM
  • Oil stocks led laggards on Monday as investors fled the energy sector.
  • Saudi Arabia slashed crude prices over the weekend, signalling the giant oil exporter was willing to absorb short-term pain for long-term market share gain.
  • Saudi Arabia and Russia failed to strike a deal on production cuts recently.

The decision by Saudi Arabia to slash oil prices has sent crude oil futures tanking. The pain has inevitably spread to oil stocks.

Ahead of the opening bell, the top-ten leading laggards were all energy stocks. They all recorded losses of over 30%.

oil stocks
Monday’s top-ten laggards were all oil stocks. | Source: MarketWatch 

Dallas-based Kosmos Energy led the list of laggards, losing 44.1%. Other energy stocks that lost over 30% included Occidental Petroleum Corporation, Parsley Energy Inc, Marathon Oil Corp. and Continental Resources Inc.

Exxon Mobil and Chevron Plunge

Dow stocks Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) haven’t been spared either. In pre-market trading Exxon Mobil plunged by 15.8%. It now trades below $50, a level last seen in 2004.

Exxon Mobil
XOM fell by nearly 16%. | Source: TradingView 

Chevron fell 15.1%. The stock is now approaching lows last recorded in 2016. Year-to-date CVX has fallen by about 20%.

Saudi Arabia
CVX fell by 15%. | Source: TradingView 

Goldman Sachs warns of $20 crude

Brent crude oil futures fell by over 30% to nearly $30 per barrel after Saudi Arabia slashed its forward crude price . The OPEC giant is also reportedly looking to increase daily crude output. This comes just days after talks with Russia to cut production collapsed.

Consequently, Goldman Sachs sees the price of Brent crude falling to as low as $20 per barrel. Goldman expects Brent to hit $30 a barrel  in the second quarter and possibly $20 after that:

we are cutting our 2Q and 3Q20 Brent price forecasts to $30/bbl with possible dips in prices to operational stress levels and well-head cash costs near $20/bbl.

Currently, Brent crude futures are being quoted at slightly below $36 .

What are the Saudis up to?

The move by Saudi Arabia to slash prices and possibly increase production may seem self-defeating in the face of a supply glut. But having failed to reach an agreement with Russia on production cuts, the Saudis are now gunning for market share.

Saudi Arabia is not only the world’s largest oil exporter, it is also boasts of lower production costs. With the potential to drill oil at $3 a barrel or below , a price war could drive expensive producers such as U.S. frackers out of business. U.S. shale producers are viewed as having benefited from OPEC production cuts but have contributed greatly to the glut.

Saudi Arabia’s strategy  is not without risks though. In November 2014, the world’s largest oil exporter allowed prices to fall with the goal of forcing shale producers out of the market. While U.S. production declined by about 10%, things didn’t materialize exactly according to plan as shale producers increased their efficiency. Saudi Arabia ended up surrendering due to its massive dependence on crude oil.