The refusal by major producers to boost output despite pressure from President Trump amid tightening global supplies pushed oil prices to their highest since July 10 on Tuesday. West Texas Intermediate crude for November delivery ended the day at $72.27 a barrel in electronic trading. The commodity is within touching distance of its recent three-and-a-half year highs when it popped above $75 a barrel.
Oil Back Over $70
Most of the recent price jump could be attributed to United States’ refusal to issue any waivers on cutting crude imports from Iran by Nov 4 when sanctions are introduced against the country’s petroleum sector. In June, President Trump withdrew from a nuclear deal with OPEC’s third-largest producer and subsequently imposed financial sanctions on the Islamic Republic. The November deadline has stoked worries about an expected cut in Tehran’s oil exports – currently at 2.1 million barrels a day – by around one million barrels and lead to a supply shortage in an already ‘tight’ oil market.
At a meeting in Algeria on Sunday, OPEC or the Organization of the Petroleum Exporting Countries – the international cartel of oil producers – and its allies did not commit to any output increase to compensate for the anticipated supply disruptions from Iran. Disregarding calls from Washington, the joint OPEC/non-OPEC (or the OPEC+) coalition said that they have no immediate plans to hike production and expressed satisfaction ‘regarding the current oil market outlook, with an overall healthy balance between supply and demand’.
Fast-falling production in Venezuela have added to the jitters. With the country tethering on the verge of an economic collapse, oil output has dwindled by more than 40% since 2016. Venezuela currently churns out around 1.4 million barrels per day, the least since the 1950s and much lower that its pledge per the OPEC-led supply cuts. Restrictive financial sanctions imposed by the United States on the Maduro regime over the past year have further strangulated the Latin American nation’s struggling energy sector.
As it is, oil inventories in the United States have generally trended lower in a year and a half. In fact, stockpiles have shrunk in 50 of the last 74 weeks and are down more than 130 million barrels since April 2017. The gradual fall has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. At 401.5 million barrels, current crude supplies are 13% below the year-ago figure though stocks are at the five-year average.
But There are Still Certain Downside Risks
The oil market, notwithstanding its recent rise, could be undermined by soaring production in the United States.
Volume from domestic oil fields (inclusive of shale) has risen more than 30% since mid-2016 to 11 million barrels per day – the most since the EIA started maintaining weekly data in 1983. In early February, oil production broke through the 10 million barrels a day threshold for the first time in nearly 50 years and has maintained the record levels thereafter.
While there is renewed optimism among oil companies amid the $70-plus WTI prices, crude’s recent gains could become self-defeating as elevated realizations have already induced producers – especially American shale drillers – to ramp up activity. Together with the scheduled conclusion of OPEC/non-OPEC production cuts in December this year and we might be looking at another selloff in oil prices.
A rise in the oil drilling rig count points to a further increase in domestic output. An early gauge of future activity, rigs drilling for oil in America totaled 866 in the week to Sep 21, as per the latest weekly report by Baker Hughes, a GE Company. That's much higher than the year-ago tally of 744, indicating a drilling resurgence in tandem with the oil revival – a big concern for investors.
Growing concerns about demand growth amid escalating trade conflict between the world’s biggest oil consumers – the United States and China – also keeps weighing on the commodity futures.
Energy Investing is Tricky
One thing the oil market downturn has taught investors: nobody has much visibility into the future. So, when you think of something as a clear line of sight one quarter, it can soon be overshadowed by an unforeseen event.
To sum up, even as crude prices continue to make their way up, it is unlikely that the commodity will be heading much higher than $70 per barrel anytime soon. In fact, uptick in the number of oil rigs, ever stronger U.S. production, the ongoing trade war and the impending end to OPEC’s output cut agreement could make any oil price strength short-lived.
On the contrary though, the commodity’s recovery to $70, predictably, has had a positive effect on stocks in the sector. In particular, savvy investors might view the price bump as the impetus the stocks need after freefalling for more than three years. Undoubtedly, still a long way to go, but improving crude prices may have already primed certain oil producers and linked entities for upward momentum.
Follow Expert Opinion
The volatility and uncertainty of oil prices make investment decisions difficult for individuals. With the future direction of the commodity’s movement being anybody's guess, it might be a wise decision to go ahead with stocks preferred by analysts who have a deep fundamental knowledge and understanding of the industry and its companies.
Stocks with brokerage upgrades are often in for a good day and probably more. Consequently, a downgrade may indicate rough days ahead. Whatever the movement, the market tends to react to it. Also, research shows that stocks with broker rating upgrades outperform those that aren't upgraded and they almost certainly record better results than those stocks that get downgraded.
Here are the Stocks
With the help of our Zacks Stock Screener, we have selected 5 stocks that have been given Strong Buy/Buy rating by 80% or more brokers. A favorable Zacks Rank #1 (Strong Buy) or #2 (Buy), which justifies a company’s strong fundamentals, further adds value to these stocks. You can see the complete list of today’s Zacks #1 Rank stocks here.
Cactus, Inc. WHD is an oilfield services provider, which designs, produces and sells a variety of specialized engineered wellhead and pressure control equipments to upstream energy firms. The stock currently has a Zacks Rank #1. In the last 60 days, two earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 16.6% in the same period.
Magnolia Oil & Gas Corporation MGY is an upstream operator in the Eagle Ford Shale and Austin Chalk formations in South Texas. The stock currently has a Zacks Rank #1. In the last 60 days, one earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 70.5% in the same period.
Northern Oil & Gas, Inc. NOG is a non-operator explorer and producer with primary focus on the Williston Basin in North Dakota and Montana. The stock currently has a Zacks Rank #2. In the last 60 days, six earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 34.1% in the same period.
PetroChina Company Limited PTR is the largest integrated oil company in China with operations in four segments: Exploration & Production, Natural Gas & Pipelines, Refining & Chemicals, and Marketing. The stock currently has a Zacks Rank #2. In the last 60 days, one earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 1.6% in the same period.
Independence Contract Drilling, Inc. ICD conducts oil and gas land drilling operations for exploration and production companies. The stock currently has a Zacks Rank #2. In the last 60 days, two earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 10.7% in the same period.
Bottom Line
For the novice investors, energy market volatility makes investing a precarious and panicky activity. However, the above-mentioned stock picks are expected to be good bets given their top ranks and brokers’ confidence.
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