The Santos Ltd (ASX: STO) share price may come under further pressure with predictions the oil price could fall towards US$30 a barrel within the next six months.
Energy consultant Dr Fereidun Fesharaki expects oil prices to slide to US$35 a barrel by the June quarter of 2016 – the opposite view of analysts who expect a gradual recovery from then. Dr Fesharaki is a former energy adviser to the prime minster of Iran – but is also known as one of the most bearish forecasters for oil and liquefied natural gas prices.
The Brent Crude benchmark oil price is currently US$44.61 a barrel, having fallen more than 50% in the past 12 months.
Dr Fesharaki says the oil price floor is in the high US$20s a barrel range – when US onshore and deep-water projects are expected to be running at a loss – which should result in oil production falling, lending support to the oil price.
He bases his predictions on expectations that OPEC won't move to rein in rising production from its member states, with Iran raising its production by around 1 million barrels a day through the course of 2016. Shale oil production has only fallen slightly – despite oil prices halving.
Dr Fesharaki is also bearish on liquefied natural gas (LNG) suggesting prices could fall from the current US$7-US$8 per million British thermal units (mmbtu) to around US$4 mmbtu. LNG prices in Asia are said to track crude oil prices with a lag of around 6 months.
CLSA analysts say the forecast is most negative for Santos and Origin Energy Ltd (ASX: ORG), both of whom have substantial slabs of debt on their balance sheets, despite their recent recapitalisation efforts. Both are also exposed to LNG price moves given their share of a number of LNG projects in Australia and PNG. So far today, share prices in both companies are tracking below the market, with the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) up 1.9%, while Santos and Origin shares are up 1.5% and 1.6% respectively, heading into the close.
Foolish takeaway
Year to date, Santos and Origin have seen their share prices roughly halve and more falls could be in store, particularly if oil and LNG prices continue to track downwards. Energy and resources stocks are clearly not the sectors to be in currently.
