Deutsche Bank (DB) analyst Paul Sankey downgraded rating on shares of Marathon Oil Corp. (NYSE:MRO), Murphy Oil Corp. (NYSE:MUR), Canadian Natural Resources Ltd. (TSE:CNQ) each to "Hold" from "Buy", while upgrading rating on shares of Chevron Corp. (NYSE:CVX) to "Buy" from "Hold".
The brokerage increased price target on shares of CVX to $130 from $115, while maintaining its old target of $37 on MRO stock, $64 on MUR and $44 on CNQ.
Sankey said he is rotating recommendation deck away from offense, with oil-levered stocks into large cap defense. In refining he sees evidence of both demand destruction and excess product supply especially around Chicago but the overall picture is positive.
Sankey's thematic analysis "The Future of US oil" note concludes that U.S. crude prices (WTI) will remain structurally discounted to international prices (Brent) on a long term basis. That is relatively positive for refiners and more Brent levered oil stocks such as Chevron.
However at the same time, the analyst believes that risk is sufficient in global oil currently for the market to be pricing to the point of demand destruction. His primary target, the U.S. gasoline market, has been contracting for some time. But that contraction has not served to balance markets, and allow oil prices to start falling.
With OECD demand already falling, the oil market will now seek to destroy emerging market oil demand growth. By the oil intense nature of GDP growth in emerging markets, that equates to an economic slowdown. The analyst believes that will be reached around $135/bbl, at the highest.
Although that leaves some $10/bbl of upside to current prices, Sankey does not believe that the equity market will pay for this final 10% up move, if it is needed; indeed it is likely global demand is already being materially constrained. Therefore oil equities can at best hold current levels if oil goes higher, or, if oil prices start falling, come under pressure.
Although the analyst sees a long term structural premium for Brent over WTI/LLS, near term he expects a narrowing in spread this year as infrastructure alleviates pressure around Cushing. But even with infrastructure, longer term a U.S. oversupply situation develops, as light refining capacity is filled and export prevented.
Sankey sees long term equilibrium from ongoing supply pressure by aggressive growth E&Ps towards the long term marginal cost of supply of $80/bbl WTI, with Brent defended at a minimum of $100+/bbl by Saudi.
At the same time as the analyst worry about narrowing Brent-WTI for refiners, shifts around Chicago in capacity, and a warm winter with weak gasoline demand, are pressuring Chicago oil product prices to a discount. This may be a temporary effect, but it is worrying for MPC.