Should Energy Investors Worry About the Latest Bad News for Oil?

The increasingly bearish outlook for crude doesn’t necessarily spell trouble for Baytex Energy Corp. (TSX:BTE)(NYSE:BTE).

| More on:

Oil is gyrating wildly yet again because of the growing uncertainty surrounding its demand. The prices of the North American benchmark blend West Texas Intermediate and European benchmark oil blend Brent are rising and falling with surprising frequency as the market reacts to contradictory data and forecasts.

This certainly isn’t good news for an industry that has been reeling under the weight of a prolonged slump in crude since 2014. The latest data indicates that sharply weak oil prices are here to stay for far longer than many industry insiders and market pundits originally predicted.

Now what?

The key the reason for the recent pessimism is the latest report from the International Energy Agency, or IEA. In it, the agency predicts that the global supply glut will last into 2017 and possibly longer. It has formed this bearish outlook from the belief that Asian energy demand will decline further than originally expected and European consumption will remain weak.

As a result, the IEA dialed down its forecast growth in the demand for oil during 2017 by 200,000 barrels per day. It now expects it to grow by 1.2 million barrels daily over the year. This is predicated on increasing uncertainty over global macro-economic conditions, China’s slowing economy, and fears that the Eurozone’s economic health could deteriorate further.

There are also considerable supply-side pressures with signs that global oil supplies are unlikely to fall in the near future.

Not only does U.S. oil production remain well above where it was when the oil crash began in late 2014, but a number of OPEC members are determined to grow production. Both Saudi Arabia and Iran, despite agreeing to hold talks over implementing production caps, have recently hiked their oil output.

Then there is Iraq, which is desperate to expand government revenues through increased crude production, so it can rebuild its war-torn economy. In recent weeks it boosted oil exports by 5% after being able to resume shipments from three oilfields in Kirkuk.

As a result, OPEC is now pumping out over 33 million barrels of crude daily, which is close to its highest level ever.

Nonetheless, I don’t expect this to have a significant impact on the energy patch because the majority of companies have adjusted their operations to remain viable in the current harsh operating environment.

Beaten-down Baytex Energy Corp. (TSX:BTE)(NYSE:BTE), which, until recently, some analysts feared would not survive, has implemented a range of strategies that allow it to continue operating. Key among them has been its decision to shutter uneconomic heavy oil production and focus on its Eagle Ford acreage, where it receives a higher average price per barrel of crude produced. It has also slashed costs, causing combined second-quarter 2016 operating and transportation expenses to fall by 25% compared with a year earlier.

Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) also appears destined to survive after its surprising $975 million asset sale, which allowed it to restore its balance sheet and reduce debt to manageable levels. It too has sharply reduced its cost structure, reporting second-quarter operating and transportation costs that were just over a quarter lower than they were for the same period in 2015. 

So what?

It now appears that substantially lower oil prices are the new norm, and while this isn’t good news for the energy patch, it is not calamitous. There are signs that the majority of companies have successfully adjusted to the harsh operating environment now in play. More surprisingly, some are even on their way to restoring profitability now that they have cast off the excesses of the boom years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »