Oil prices are still displaying continued weakness in the broader global commodity complex. Oil prices have been trickling down since last Friday, when the Organization of the Petroleum Exporting Countries (OPEC) decided to maintain a production ceiling that reflects the “current actual” output.
This put the spotlight on the sector’s financial strength — in particular on its ability to continue servicing debt and paying out dividends, a fear confirmed on Wednesday when Kinder Morgan Inc. KMI announced a 75% dividend cut. However, developments in Congress drew a silver lining for the commodity.
Congress is under constant pressure from the Republican majority for lifting the four-decade old ban on the country’s oil exports. What makes it more interesting is that Democrats are only asking for equal concessions for the renewable energy space.
Improving Inventories
Energy Information Administration (EIA) in its December Short-Term Energy Outlook forecast that U.S. crude oil production declined by about 60,000 barrels per day in November from October. Crude oil production is forecast to decrease through the third quarter of 2016 before growth resumes in late 2016.
The most recent EIA report revealed that crude inventories decreased by 3.6 million barrels in the week ending Dec 4. At 485.9.0 million barrels, U.S. crude oil inventories remain near levels not seen at this time of the year in at least the last 80 years.
Similarly, the latest monthly oil rig count from Baker Hughes Inc. BHI was down by 31 from the previous month to 760 in November. The fall in rig count also points to less crude production going into the future.
Lifting Export Ban Now Only a Matter of Time
Given the present scenario, lifting the four-decade old ban on U.S. oil exports makes more sense. This mood is now echoing from the divergent corners of Capitol Hill. Initiation of exports would greatly help the beleaguered books of independent exploration and production companies.
Capitol Hill has seen intense lobbying by industry majors for lifting the ban. These include the likes of ConocoPhillips COP CEO Ryan Lance, Continental Resources Inc.’s CLR Harold Hamm, Hess Corp.’s HES John Hess and Pioneer Natural Resources Company’s PXD Scott Sheffield.
If the present trend of patronage continues, the House will likely vote in favor of lifting the ban. This would certainly bring a fresh lease of life to the energy space, so long embroiled in apprehensions pertaining to the Chinese economy, hiccups over the Fed rate hike, a stronger dollar and near-record production from OPEC (mainly in Saudi Arabia and Iraq).
Oil Investors to Profit
A prolonged period of low oil prices has eventually lent quality upstream assets some cheap valuations. Therefore, we would like to draw investors’ attention to the neglected upstream space, where most players are trading below par. Smart investors might see this as a window of opportunity.
As such, with oil hovering around the $37-a-barrel level, investors with an appetite for gains should pick the upstream gems out of the rubble with the help of the time-tested Zacks Rank Methodology which arranges stocks from #1 (Strong Buy) to #5 (Strong Sell).
Smart Picks
If the export bill is passed, the biggest gainers would be the West Texas Intermediate (WTI) exposed upstream players. Investors can start accumulating some well-placed players in the upstream space like Antero Resources Corp. AR, Contango Oil & Gas Co. MCF and Profire Energy, Inc. PFIE. Each of these stocks sports a Zacks Rank #1 (Strong Buy).
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