This has nothing to do with Putin:
Jonathan Ratner, Financial Post · Oct. 16, 2014 | Last Updated: Oct. 16, 2014 11:00 AM ET
A massive selloff in energy stocks followed Saudi Arabia’s recent indication that it is comfortable with a lower oil price than the market thought.
Previous market views held that Saudi Arabia needed Brent oil prices around US$100 per barrel to adequately budget for social spending to avoid Arab Spring-like unrest. But Saudi Arabia said it is fine with a price of US$80 to protect market share.
Canaccord Genuity analyst Karl Chalabala shares the market’s view that Saudi Arabia wants to pressure U.S. shale producers that have higher break-even costs out of business.
Mr. Chalabala suggested Monday’s declines almost amounted to a “Black Monday” type of event for U.S. exploration and production companies.
Oil-weighted names with over-levered balance sheets were hit the hardest, particularly those in early stage plays such as the Tuscaloosa Marine Shale, as well as small caps in general.
The analyst noted that the relative strength index on the U.S. producer indexes — the SPDR S&P Oil & Gas E&P ETF and the SIG Oil Exploration & Production Index — has hit oversold levels that are comparable or worse than those during the financial crisis.
“This created a perfect storm as I believe long-onlys stropped supporting E&P names into year-end, leading to a hedge fund-driven market,” Mr. Chalabala said in a research note.
He pointed out that the U.S. Securities and Exchange Commission responded with an unprecedented move by enforcing 20 short-sale rules on names such as Goodrich Petroleum Corp., SM Energy Co. and Laredo Petroleum Inc.
“Our coverage names got thrown out as well on the Saudi news, which does not make fundamental sense on a commodity basis,” the analyst said, noting that the natural gas price strip (the average price for the next 12 months) barely moved and is heading into its strongest seasonal period.
“The Saudis position on oil means literally nothing to the majority of my names on a fundamental basis,” he added. “Until LNG exports kick in (mid-2015), local pricing dynamics are the governor.”
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