The biggest news of the week in energy was that Brent crude oil prices fell by 7% to $71.32 per barrel, which sent most energy stocks into a tailspin. The price drop was largely driven by the release of relatively weak U.S. economic data. The ISM manufacturing reading was just 47.2%, indicating a contraction in manufacturing orders. On Friday, we learned just 142,000 jobs were added in the U.S. in August, well below the 161,000 expected, and revisions subtracted another 86,000 jobs from estimates in previous months. Add it all up, and the result left investors feeling less bullish about the demand outlook for oil.
Oil producers and suppliers felt the impact of the news more sharply. According to data provided by S&P Global Market Intelligence, Transocean (RIG -1.12%) shares fell by as much as 13.3% this week and ended the week down 12.7% while Vital Energy (VTLE -0.10%) dropped by as much as 21.4% and closed Friday down 21.2%. One positive outlier was Sable Offshore (SOC 0.25%), which gained 29.5% this week.
The decline in oil will hit companies hard
Crude oil's price decline won't be felt evenly across the energy industry. Smaller explorers like Vital and service companies like Transocean will see revenues dry up and their already-negative free cash flows decline further if crude continues to drop. And the market's expectation that demand will be weak isn't good news either.
RIG Free Cash Flow data by YCharts.
It's not clear when higher oil prices might be coming. The global economy appears to be slowing down and unless OPEC+ decides to cut production, there may not be any catalysts that boost prices in the near future.
A big break
There was a big catalyst for Sable Offshore this week when the company reached a settlement with Santa Barbara County in California. The company's offshore platforms had been shut down since a 2015 oil spill, and the county had stalled approving safety valve installations for the field. But that ended when a federal court said the county didn't have jurisdiction over the pipeline.
Sable will install 16 safety valves, and expects to start production from its Santa Ynez Unit in the fourth quarter. That will start revenue generation for the company, which has recently been doing nothing but burning cash.
Oil's uncertain future
It's been a wild few years for the oil industry -- going from negative prices in 2020 to over $120 per barrel in 2022. But now supply and demand seem to be more in balance, just as the economy is starting to slow.
Brent Crude Oil Spot Price data by YCharts.
Without higher prices, it'll be tough for many of these companies to make money. Offshore drilling operators, in particular, feel the pinch of lower prices because demand for rigs drops, and falling dayrates can put those companies underwater.
I think the oil space will be difficult to invest in for the foreseeable future as demand could weaken in step with the economy. Even interest rate cuts from the Federal Reserve would take months to provide relief, and by that point, oil prices may be even lower. This week's decline could be a sign of what's to come.
