October 26, 2018 / 4:53 PM / 24 days ago

Global oil pricing worries hit U.S. energy shares as earnings loom

    By Caroline Valetkevitch
    NEW YORK, Oct 26 (Reuters) - Worries over global oil pricing
and pipeline constraints are hanging over the energy sector as
U.S. companies begin to report quarterly results, with many
producers' shares trading lower on the year.
    Third-quarter profits for oil producers generally should be
higher than a year ago, because the average price per barrel was
up about 44 percent over the same period last year. But now oil
prices are headed for their third straight weekly decline,
extending a slide on concerns that slower global economic growth
and the U.S.-China trade war could dent demand. 
    U.S. crude        is on track for a decline of roughly 9
percent for the month, while the S&P 500 energy index         is
down about 12 percent so far in October compared with the
benchmark S&P 500's        roughly 8 percent decline.   
    U.S. crude prices        averaged $69.43 a barrel in the
third quarter, up sharply from $48.20 a year earlier. Analysts
expect this helped boost S&P 500 energy companies' quarterly
earnings 102.9 percent, the biggest expected year-over-year
growth among sectors, according to I/B/E/S data from Refinitiv.
    That would be the biggest expected year-over-year percentage
growth of any sector for the quarter. Still, some investors say
it may not be enough to reverse the trend in shares given trade
and other worries.
    "I expect earnings will be good because the last quarter's
prices were good," said Rick Meckler, partner at Cherry Lane
Investments, a family investment office in New Vernon, New
Jersey. 
    But, "it has been very difficult for these companies to
forecast pricing because it has been so volatile," he said. 
    Companies that provide drilling and other work for U.S.
producers have blamed a near-term slowdown in services demand
due to pipeline and other constraints, particularly in the West
Texas shale fields. 
    While U.S. sanctions against Iranian oil exports could
support prices in the coming months, top exporters Saudi Arabia
and Russia have been signaling they expect to increase
production, which should limit increases.
    Upcoming earnings reports, with Exxon Mobil         and
Chevron         both due Nov. 2, could reflect those issues.
Exxon is down nearly 9 percent for the month to date, while
Chevron is down nearly 10 percent.
    "We've seen oil prices sell off here throughout the
correction we've had in the broad market. The concern in the
sell-off is clearly global growth, and that's immediately
reflected in oil prices," said Tim Ghriskey, chief investment
strategist at Inverness Counsel in New York.
    UBS analysts expect oil demand to grow more slowly in 2019,
on higher oil prices and weaker economic growth.             
    Another producer, Hess Corp        , is due to report
Wednesday, while ConocoPhillips        , the world's largest
independent oil and gas producer, beat analysts' estimates for
profit in the third quarter when it reported Thursday, citing
higher oil prices but also cost cuts.             
    Recent losses aside, some equity strategists consider oil to
be in a bullish cycle and expect prices to rise further over the
next year.
    Energy shares have sharply underperformed oil prices so far
this year, suggesting there is room for shares to rise further.
   
    "People are still thinking we're at $40 a barrel oil. We're
not," said Robert Lutts, president and chief investment officer
at Cabot Wealth Management in Salem, Massachusetts, which owns
shale producer Diamondback Energy          and other names. 
    "People are misjudging the balance between supply and
demand," said Lutts, who sees U.S. oil prices heading toward $80
to $90 a barrel within a year.
    Even with the recent selloff, U.S. oil prices        are up
about 11 percent for the year to date, while the S&P 500 energy
index is down about 8 percent for 2018 and market leader Exxon
is down nearly 8 percent.
    Some money managers also consider energy shares to be
attractive because prices have come down, but many remain
cautious on the sector.
    "To get a sustained move in oil stocks, where they
consistently outperform other sectors and where the sector is
actually growing as a component of the S&P 500, you need a lot
of things like the supply constraint and global growth. We're
not there right now," said Bucky Hellwig, senior vice president
at BB&T Wealth Management in Birmingham, Alabama.

    
 (Reporting by Caroline Valetkevitch; additional reporting by
Gary McWilliams in Houston and April Joyner in New York; Editing
by Alden Bentley and David Gregorio)
  
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