ASX energy shares are poised to finish the trading week on a stronger footing after the oil price rallied overnight.
But the dramatic recovery for these stocks from their bear market low may have run out of fuel!
Morgans is sounding the warning bell even as the WTI oil price surged by US$65 to US$27.66 a barrel in less than four weeks since crashing into negative territory. I suspect that's a record bounce over the timeframe for the WTI benchmark.
The more relevant (to Australia) Brent crude price didn't slip into negative, but it's staged a pretty stellar 62% climb over the same period to trade at US$31.13 a barrel.
Running ahead of the market
"We remain long-term oil bulls, but it is hard to maintain this positivity towards the sector when key energy stocks so strongly outperform oil prices," said the broker.
By its reckoning, the jump in Woodside Petroleum Limited (ASX: WPL) share price and Oil Search Limited (ASX: OSH) share price imply an oil price of around US$47 a barrel.
Meanwhile, the Santos Ltd (ASX: STO) share price will need an oil price of US$42 a barrel to justify its recovery.
The long road to recovery
"We view this level of market optimism as dangerous given not only the massive demand impact from Covid-19 restrictions, but also because of new macro risks emerging," said Morgans.
"Key amongst these is the growing risk of a new Trade War breaking out between the US and China, with tensions escalating from the ongoing health and economic crisis.
"Even barring a new trade war, we expect oil demand loss (currently at an unprecedented c.30mb/d) will take multiple years to recover, with the market not yet in a position to accurately analyse all of the fallout."
Going nowhere fast
The chance of oil prices jumping back to over US$40 a barrel looks pretty slim even as Goldman Sachs sounded a positive note on the commodity.
The broker believes that the oversupplied market is heading back towards a deficit next month, according to a report on Reuters.
Oil production cuts by OPEC and Russia will limit supply as demand picks up pace from the restarting of major economies like China and the US.
Oil price forecasts
While that means we may have seen the lows for oil, Goldman Sachs thinks oil prices may be stuck at current levels for a while. It's forecasting US$30 a barrel for Brent and US$28 per barrel for WTI during the Northern Hemisphere summer months.
"We believe that the next stage of the oil market rebalancing will be one of range-bound spot prices with the most notable shifts being a decline in implied volatility as well as a continued flattening of the forward curve without long-dated prices rising yet," said Goldman Sachs.
Here come the downgrades
Investors may have to wait a few years to see the oil price catch up to the share prices of our major energy stocks.
On that sombre note, Morgans lowered its medium- to long-term forecasts on the Brent oil price. This meant that the broker also had to downgrade its recommendation on Oil Search, Woodside and Santos to "hold" from "add".
