Goldman Sachs Analyst Reports Play Havoc With Oil Sector

NEW YORK (TheStreet) -- Oil stocks were plummeting in early trading Monday after Goldman Sachs on Sunday played into investors' worst fears about oil prices, cutting forecasts for Brent and West Texas Intermediate crude prices. The reports cited a global oversupply driven in part by the boom in U.S. production and by lessening demand. The analysts downgraded a brace of stocks, particularly oil services stocks like Patterson-UTI Energy (PTEN) .

The reports projected stocks with significant exposure to U.S. land-based drilling in the West to do better, reiterating its buy rating on Halliburton (HAL) but lowering its 12-month price target on the stock to $65 from from $87.

Shares of Patterson-UTI were down 9.2% to $22.24 in mid-morning trading Monday. Shares of Halliburton were down 5.4% to $52.79. The Philadelphia Oil Services Sector Index (^OSX) was down 3.8%. The index has fallen 16% year to date as oil prices have tumbled to their lowest levels since 2012.

The analysts said prices for U.S. crude need to drop further to $75 a barrel before a slowdown in production would kick in, putting a stabilizing upward pressure on prices, but that prices will average around $74 a barrel for 2015. That is a nearly 18% drop from its previous forecast of $90 a barrel.

Benchmark U.S. crude fell 92 cents to $80.08 in trading in New York. 

We acknowledge that we have missed the OSX's initial sell-off, but we still see more downside risk should WTI fall to $70/bbl ($80+/bbl currently) by 2Q15 as we now expect.

Oil stocks are likely to match that drop, bottoming out in the second quarter of 2015 and beginning to recover in the third quarter, the analysts said.

GS believes that WTI will likely average around $74b in 2015, averaging around $75/bbl in 1Q15, bottom out at $70/bbl in 2Q15 as demand softens seasonally, before picking back up in 3Q15 to $75/bbl during the domestic driving season. We expect stock prices to respond and bottom out around 2Q15, as rig count starts to weaken.

We expect the rig count to start softening following the Christmas break, as many small/private firms initially and later the larger public companies cut spending in response to the low commodity prices.

In a separate report, the analysts lowered their projection of Brent crude to $85 in the first quarter of 2015 and $80 in the second quarter, recovering to $85 for the second half of the year.

The drop in oil prices heralds larger changes in the global oil landscape, including rising non-U.S. production, particularly in Brazil; flat to rising production in OPEC countries excluding Saudi Arabia "driven largely by Iraq"; and a "greater recognition by Saudi Arabia of the role U.S. growth is playing," reducing that country's willingness to cut production and raise prices.

Goldman downgraded several stocks in oil services, including Patterson-UTI Energy, Pioneer Energy Services (PES) and Emerge Energy Services (EMES) from "buy" to "neutral," and Basic Energy Services (BAS) from "buy" to "sell." Diamond Offshore Drilling (DO) was also downgraded from "neutral" to "sell."

-- Written by Carlton Wilkinson in New York

More from Investing

Nvidia Reports Earnings on Thursday: 5 Important Things to Watch

Nvidia Reports Earnings on Thursday: 5 Important Things to Watch

Resideo Rises on Solid Quarterly Results, Reaffirms Guidance

Resideo Rises on Solid Quarterly Results, Reaffirms Guidance

Did You Get That Voicemail? What You Need to Know About Cisco

Did You Get That Voicemail? What You Need to Know About Cisco

Oil Services Are Hitting Their Lowest Point in Over a Decade

Oil Services Are Hitting Their Lowest Point in Over a Decade

Tilray Slips as Q3 Revenue Misses and EPS Is a Little Better Than Estimates

Tilray Slips as Q3 Revenue Misses and EPS Is a Little Better Than Estimates