Avi Salzman

Oil prices are sliding toward $50 a barrel, and money managers are as bearish on the sector as ever. But given the forces pushing oil down, they may still not be bearish enough. Oil prices and company earnings estimates look like they still have room to fall, and the stocks may be in for another leg lower.

West Texas Intermediate crude, the U.S. benchmark, was down 2% to $57.13 per barrel on Monday.

From here, there's a good chance that things get worse.

"We think WTI near $50 per barrel is likely the next key level on the current trajectory," wrote RBC Capital Markets strategist Brian Leisen in a report.

Oil is struggling because of both supply and demand problems. On the supply side, OPEC and its allies are ramping up supply much faster than expected, with daily production set to rise by nearly one million barrels of oil by June from March levels. OPEC wants to take back market share from countries such as the U.S., and is clearly willing to endure lower oil prices to make it happen.

Demand isn't rising nearly fast enough to sop up all that extra supply. In fact, global oil demand in April was flat with year-ago levels, according to J.P. Morgan.

The fact that oil is facing both supply and demand problems means that there's no easy way out of this slump. Most other sectors of the economy only face demand pressure, mostly due to President Trump's tariffs. If the tariffs go away, those sectors could be in the clear, but energy would still face a supply glut.

The scenario that bullish energy investors are hoping for is that U.S. producers start to pull back their drilling operations, leading to a decline in U.S. output. Once producers capitulate, and reduce supply, prices ought to rebound. But there are only small signs of that happening so far, with two companies announcing modest declines in capital spending -- Matador Resources and EOG. Exxon Mobil and Chevron are sticking to their capital spending plans, the companies said on Friday.

At $50 oil prices, most companies can still make money on wells they're already operating. But they'll almost certainly have to spend less on shareholder friendly policies like stock-repurchases, and few will be able to drill new wells profitably.

Analysts' earnings expectations for oil companies have come down since the start of the year, but they may still have room to fall. Shale-driller Devon Energy is now expected to earn $4.19 in 2025, down 8% from the start of the year, for instance. But oil prices are down 20% over that period. Unless prices bounce back, earnings estimates may be coming down too.

Write to Avi Salzman at avi.salzman@barrons.com

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May 05, 2025 14:58 ET (18:58 GMT)

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