Oil and Gas Prices Expected to Remain Under Pressure

Mizuho analyst Nitin Kumar downgraded the shares of several energy companies on Wednesday, citing concerns about weakening global demand and the resulting impact on oil and gas prices. As part of this rating change, Kumar lowered his ratings on Exxon Mobil Corp. (XOM) and Occidental Petroleum Corp. (OXY) from "buy" to "neutral." He also adjusted his stock price targets, reducing Exxon Mobil's target from $133 to $117 and Occidental's target from $72 to $63.

Kumar noted that while OPEC+ is taking steps to support the oil markets by controlling supply, factors such as slower demand recovery and strong non-OPEC supply have created headwinds. He stated, "Although we believe that the markets have recently overshot to the downside, we expect oil prices to remain range-bound in 2024 until there is more clarity on global demand, international travel trends, and China's economic reopening."

Recent Developments and Concerns

Recent reports indicate that oil prices have ended lower, with 2024 marking the first losing year for crude oil since 2020. Additionally, crude oil futures experienced their first real "death cross" since the pandemic plunge of early 2020. However, there has been a slight rebound in early trading on Wednesday, with crude oil futures bouncing by 0.9%. Despite this, futures are still trading approximately 24% below the 13-month closing high of $93.68 reached on September 27.

Risks and Implications

Kumar believes that the weakness in commodity prices increases the likelihood of Wall Street analysts lowering earnings and cash flow estimates for 2024. This adjustment by analysts could potentially impact energy stocks, as it may limit their upward growth potential.

It remains imperative for market participants to closely monitor global demand dynamics, international travel trends, and China's economic reopening to gain a clearer picture of future oil price movements.

U.S. Natural Gas Demand and Export Capacity Delays Impact Prices

U.S. natural gas demand is currently anticipated to remain strong, but the delay in building export capacity for liquid natural gas (LNG) suggests that recent price weakness may persist until inventory levels normalize in 2024.

Price Volatility in Natural Gas Market

The prices of natural gas futures (NG00) have seen a significant decline of 36% since the end of October. Despite a 1.7% increase early Wednesday, the future prices continue to experience fluctuations.

Energy Stocks Performance

Exxon Mobil and Occidental Petroleum have both experienced a minor decrease in their stock prices, falling 0.2% in premarket trading. In 2023, Exxon observed a 9.4% loss in its stock value, while Occidental recorded a 5.2% decline. Additionally, crude futures have fallen by 10.7%, whereas the S&P 500 index showed a substantial gain of 24.2%.

Recommendations to Investors

Analyst Kumar recommends that investors focus on stocks with the potential for self-generated catalysts in light of anticipated sideways commodity prices in 2024. These catalysts can stem from the company's asset base or exceptionally low balance sheet leverage.

Mizuho's Top Picks in the Energy Sector

Mizuho presents its "Top Picks" in the energy sector, including Chevron Corp., Coterra Energy Inc., and Civitas Resources Inc. Analyst Bill Janela has upgraded Civitas Resources Inc. to a buy rating from neutral.

Upgrades and Downgrades

Kumar has downgraded shares of Antero Resources Corp., Gulfport Energy Corp., Callon Petroleum Co., Crescent Energy Co., Southwestern Energy Co., and Comstock Resources Inc. to neutral or underperform. Conversely, PBF Energy Inc. has been upgraded to a buy rating from neutral, and CNX Resources Corp. has been upgraded to neutral from underperform.

In conclusion, while U.S. natural gas demand remains strong, the delay in building export capacity for LNG has resulted in price weakness. Investors are advised to consider stocks with self-generating catalysts, and Mizuho highlights its top picks in the energy sector, including Chevron Corp., Coterra Energy Inc., and Civitas Resources Inc.