Oil prices advanced to their highest level in almost two weeks yesterday following an extremely positive gross domestic product (GDP) report. In New York, West Texas crude was up $1.86 (or 3.4%) on Tuesday to close at $57.12 per barrel. However, considering the weak crude dynamics – ample supplies in the face of weak demand – the commodity is likely to remain under pressure, at least in the near-to-medium term.
Improved GDP Figures = Improved Consumption
In its final reading, the U.S. Commerce Department said that the GDP rose by an eye-popping 5% annually in the third quarter – the fastest pace of domestic economic growth for the period in 11 years – better than the 3.9% reported last month and outperforming analyst expectations of a 4.3% increase. Importantly, the big GDP figure bolstered expectations that fuel demand in the world’s biggest oil consumer may increase.
Crude Still in Stormy Waters
Notwithstanding yesterday’s slight bounce, the commodity still remains beaten down and is headed for the biggest yearly fall since 2008. WTI has almost halved in value since June on oversupply fears in the face of weak demand, reaching a five-and-a-half-year low of $53.60 last Thursday.
Currently, oil is deeply entrenched into a bearish territory and has fallen below the $60-a-barrel level following OPEC’s decision to hold production unchanged, the effects of booming shale supplies in North America, weakening growth in China and a stagnant European economy. Moreover, a stronger dollar made the greenback-priced crude dearer for investors holding foreign currency.
Investors Continue to Be Wary
Despite support from the revised GDP growth estimate, nothing really seems to have changed fundamentally regarding the current oil supply glut. With crude inventories brimming, the commodity is very well stocked. On top of that, OPEC members (like Saudi Arabia) have made it clear time and again that they are more intent on preserving market share rather than attempting to arrest the price decline through production cuts. Therefore, the commodity is likely to start its downward journey afresh once the GDP euphoria fades.
Steer Clear of Bottom-Ranked E&P Names
While expecting more punishing times ahead, we see little reason for investors to dip their feet into companies in the exploration and production (E&P) sector, as they will be able to extract less value for their products. In particular, we suggest avoiding exposure to mid- and small-cap E&P plays with a Zacks Rank #4 (Sell) or Zacks Rank #5 (Strong Sell) like EXCO Resources Inc. (XCO), Halcón Resources Corp. (HK), Bonanza Creek Energy Inc. (BCEI), Rosetta Resources Inc. (ROSE) and Oasis Petroleum Inc. (OAS). These producers have negative returns year to date and has been witnessing downward earnings consensus estimate revisions for the current quarter and year.
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