EIA Forecasts Lower Crude Prices, Small E&Ps to Suffer Most

The Energy Information Administration (EIA) – which provides official energy statistics from the U.S. government – has lowered its crude price expectations for 2014 on the back of a supply glut in the face of tepid demand.

China to Spearhead Demand Growth

The agency, in its most recent Short-Term Energy Outlook (:STEO), said that it expects global oil demand growth of 1 million barrels per day in 2014. EIA’s latest forecasts assumes that in the medium-to-long term, while the Western economies and Japan exhibit sluggish growth prospects, global oil demand is expected to get a boost from sustained strength in China, which continue to expand at a healthy rate despite some moderation.

Supply to Outpace Demand

But importantly, the EIA’s latest report assumes that world supply is likely to comfortably outpace consumption growth and go up by 1.6 million barrels per day in 2014. Much of this growth will come from the shale revolution in U.S. and Canada. As a reminder, the U.S. output averaged 8.7 million barrels per day in September, the most since July 1986.

Result: Prices to Suffer

Consequently, EIA forecasts West Texas Intermediate (WTI) crude oil prices to average $91 per barrel in the fourth quarter, $2 per barrel lower than predicted in last month’s STEO.

As it is, WTI crude is currently trading below $90 per barrel to their lowest level since Apr 2013 on plentiful supplies and lackluster demand. Moreover, a stronger dollar made the greenback-priced crude dearer for investors holding foreign currency.

Small Oil-Focused Equities Most Susceptible

While all crude-focused stocks – including behemoths like Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) – stand to lose from falling commodity prices, companies in the exploration and production (E&P) sector are the worst placed, as they will be able to extract less value for their products. In particular, we suggest avoiding exposure to mid- and small-cap E&P players.

Companies with a Zacks Rank #4 (Sell) or Zacks Rank #5 (Strong Sell) like Miller Energy Resources Inc. (MILL), Sanchez Energy Corp. (SN) and Forest Oil Corp. (FST) look to be in the most trouble. These companies have negative returns year to date and has been witnessing downward earnings consensus estimate revisions.

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