Energy sector will turn profitable in 2016, says expert

By @diplomatist10 on
CubanTechnicians work in an oil rig of the Great Wall Drilling Company, a subsidiary of China National Petroleum Corp (CNPC), in Varadero, Matanzas province, Cuba, during an organized tour by the state-run Cuba-Petroleo (CUPET), October 21, 2015. Cuba plans to drill exploratory deepwater wells in the Gulf of Mexico by the end of 2016 or beginning of 2017 despite current low oil prices, officials from the state oil monopoly said. Reuters/Enrique de la Osa

Even as falling oil prices are worrying producing states like Saudi Arabia and Canada besides oil companies, an analyst has some assuaging price outlook for the energy sector in 2016.

According to Craig Columbus of Tower Square Investment Management, the worst-performing energy sector in 2015 will turn profitable in 2016.

“We are now at peak energy pessimism. If you look at commodity bear-market cycles, they typically last 20 years, but most of the price damage is done in the first six years. We've had five consecutive negative commodity-priced years," Columbus told CNBC Power Lunch program.

The energy sector of the S&P 500 fell more than 20 percent in 2015 and had been trailing other 10 sectors. Some of the reasons fuelling the optimism of Columbus are the outlook on US dollar and non-OPEC supply.

Weakening shale

“Dollar appreciation will still be up, but less, in 2016, and as non-OPEC supply starts to flatten, as that shale production starts to come off, I think it will create opportunity in things like natural gas,” he said.

It may be recalled that dollar gained over 8 percent against many currencies in 2015 and natural gas prices fell more than 35 percent in 2015. However, Columbus is advising investors to be patient.

“I thought once we took out US$38 on oil, we would trend back down to the mid- to low-$30s, so I think you have to be patient. Wait for WTI to pull back to you," the analyst added.

Fracking jobs vanishing

Meanwhile, the explosive job growth in the oil and gas sector of the US economy that followed fracking revolution is on the way out. If fracking put American energy workers back to work after recession, in 2015, the job gains in the energy sector was at a minimum.

This is driven  by plummeting oil prices and layoffs of more than a quarter of million workers, said industry consultant Graves & Co. The forecast said energy business will endure more job cuts and bankruptcies will not be a surprise in early 2016.

The plight in oil sector is amply reflected in the decrease of active oil and gas rigs in the US, which fell 61 percent to 698 as of Dec. 31, compared to a year ago, according to Baker Hughes.

Low prices

The record-low oil prices are driving down gasoline prices to below US$2 per gallon (AU$2.78) in a majority of the US gas stations, noted AAA, fuelling record sales of new vehicles and driving up shopping.

The continued global glut of oil created by the surge in US oil output and high production by the OPEC dented the profit margins of companies, making job cuts rampant in all energy companies.

With oil trading below US $40 (AU$55.53) a barrel since 2009, global giants such as Royal Dutch Shell, Chevron and Halliburton are slashing jobs, reports USA Today.

The only exception is the midstream energy sector, where pipeline and energy transport companies operate. They are not as hard hit as the producers, according to Graves & Co.