What: Crude prices slumped this week, dropping roughly 8% on worries that the supply surplus is not abating as fast as oil traders had hoped. This sparked another round of selling in the oil sector. According to data from S&P Global Market Intelligence, the biggest decliners this week were Oasis Petroleum (OAS), Denbury Resources (DNR), Gener8 Maritime (NYSE: GNRT), Whiting Petroleum (WLL), and Eclipse Resources (NYSE: ECR).
So what: U.S. oil benchmark WTI Crude Oil ended the week just below $45.50 a barrel, which is well off its recent high of $51.25 per barrel. The biggest weight on oil was inventory data from the U.S. Energy Information Administration, which showed a 2.2-million-barrel decline in oil supplies and a 100,000-barrel decline in gasoline inventories, both of which were less than the market wanted. This bearish data was all the market needed to bail on enhanced oil recovery specialist Denbury Resources and Bakken-focused producer Oasis Petroleum, which need market fundamentals to improve in order to fuel higher prices, which will drive cash flow growth. The lackluster market conditions also weighed on oil tanker Gener8 Maritime, which needs an active oil market to drive higher rates for its vessels.
While the weak oil market also weighed on leading Bakken-producer Whiting Petroleum, it had the added misfortune of being downgraded by Goldman Sachs. The bank's analysts cut the stock from buy to neutral and reduced their price target by $1, to $12.75 per share. They did so citing the company's weaker capital efficiency, which they expect will lead to a higher cash burn rate in the future.
Meanwhile, Eclipse Resources' sell-off this week is partially due to the follow-through of last week's equity offering. That said, while investors did not like the dilution, credit rating agency Moody's cited it as the catalyst behind its decision to upgrade Eclipse's credit rating from Caa2 to Caa1. While that is still a very speculative rating, the company now has a considerable cash balance to fund drilling, which "should allow for meaningful deleveraging," according to the rating agency.
Now what: The price of crude seems stuck below $50 a barrel, which isn't the best news for the oil sector. Producers and service companies alike need oil to move closer to $70 a barrel to drive meaningful improvements in their results. However, with oil inventories still elevated, it could be a while before oil resumes its rally.