Standing on the threshold of 2016, if you have an appetite for ‘energy’ stocks in a choppy market, you ought to first screen the industries from the broader energy sector for the prized catches.
Several studies and historical data have proven that average stocks belonging to top-performing industries have a greater probability of outperforming the ‘blue-chips’ in a relatively poor-performing industry. And what best way to narrow down your search than to resort to some expert advice – in this case the Zacks Industry Rank.
Before going to the stocks from the thriving industries, we need to predict the oil price in the coming year after analyzing the commodity price movement in the past. This is because crude primarily determines the fate of the oil companies.
Will Oil Recover in 2016?
Before analyzing how oil will behave in 2016 we need to know the commodity price movement in the past. Investors regularly tracking the energy sector know that the industry has been witnessing weak crude prices for more than a year. This weakness is primarily due to oversupply of the commodity in the midst of lackluster global demand.
Here’s a quick recap on the history of crude oversupply. During 1990 and early 2000, the U.S. was more dependent on crude import as domestic demand was far above its conventional oil supply. But with the invention of new techniques like hydraulic fracturing and horizontal drilling, U.S. shale producers ramped up oil production relentlessly. Eventually, owing to the huge scale of crude output, U.S. started relying less on oil import.
The shale boom turned the U.S. into an oil surplus economy from a crude deficit region. Along with the U.S., the Organization of the Petroleum Exporting Countries (OPEC) – the international cartel of oil producers – also pumped up more crude. All these events led to a global oversupply of the commodity and pushed oil to its multi-year low marks.
It is a known fact that crude weakness started from the second half of 2014. During January to June 2014, West Texas Intermediate (WTI) crude traded over $100 per barrel many times. But from Aug 2014 plummeting oil started upsetting the market heavily. Since then, the market has not seen recovery of the commodity till now.
Lowering production by the major players like OPEC, Russia and U.S in the already oversupplied crude market is the prime way to recover oil price. However, in the recent contentious Vienna meeting, OPEC decided not to cut oil production. In fact, the cartel decided to raise the ceiling of daily production from the prior level of 30 million barrels to 31.5 million barrels.
This event further weakened the commodity and dragged the price much lower. Going through the oil price it is clearly evident that WTI crude closed at $37.35 per barrel yesterday, less than half the price of the commodity during the mid-2014 level.
Will oil continue to see this weak pricing scenario in 2016? Paris-based International Energy Agency (IEA) – the energy-monitoring body of 28 industrialized countries – announced that abundant supply of oil will persist till next year – as OPEC continues to pump more oil. On top of that, the Energy Information Administration (EIA) – which provides official energy statistics from the U.S. government – projects average WTI oil price of $51 per barrel in 2016. Overall, we can say that there is almost no possibility of a respite to the commodity prices next year.
Short-Listing 3 Industries with Zacks Industry Rank
Leveraging on the indigenous Zacks methodology, we have shortlisted three broader energy industries having a strong Zacks Industry Rank. The way to look at the complete list of 260+ industries is that the outlook for the top one-third of the list (Zacks Industry Rank of #88 and lower) is positive, the middle 1/3rd or industries with Zacks Industry Rank between #89 and #176 is neutral while the outlook for the bottom one-third (Zacks Industry Rank #177 and higher) is negative.
The broader energy sector includes three industries like Oil Refining & Marketing, Oil/Gas Production Pipeline MLP and Oil & Gas Drilling that have Zacks Industry Rank in the top 1/3rd proportion of the total Zacks Rank. These suggest their inherent sector strengths and potential to outperform in the long term. To learn more visit: About Zacks Industry Rank.
Oil Refining & Marketing
As already mentioned, oil price will likely remain low in 2016 and the refining and marketing sector is expected to gain. Refiners buy crude for producing refined petrochemical products. Since oil is projected to stay weak, refiners will get cheap oil and hence can lower the operating cost significantly. The retail stations will also gain as they can buy low cost refined products like gasoline for distributing in the market. The industry has Zacks Industry Rank #12.
The top pick from this industry is Murphy USA Inc. MUSA. The El Dorado, AR-based company has a chain of retail stations. Murphy USA currently carries a Zacks Rank #1 (Strong Buy), implying that it will significantly outperform the broader U.S. equity market over the next one to three months.
Oil/Gas Production Pipeline MLP
Ramping up of oil production during the past few years has caused the commodity market to enter the oversupply territory. Still there is no slowdown in the crude production as all the big players are competing for their own share. This definitely calls for storage and transportation services especially when the analysts are expecting the oversupplied market to continue in 2016. This industry has a Zacks Industry Rank #64.
The top pick from this industry is PBF Logistics LP PBFX. The Parsippany, NJ-based player operates refined petroleum products storage and transporting facilities. PBF Logistics also carries a Zacks Rank #1.
Oil & Gas Drilling
With weak crude prices, the oil exploration and productions companies are hiring less drilling rigs. This is definitely hurting the drillers as fewer rigs are now under contract. Despite all these events there are few drilling firms that look prospective and capable of gaining in the near term. The industry has Zacks Industry Rank #67.
The top pick from this industry is Ocean Rig UDW Inc. ORIG. The Nicosia, Cyprus-based player is an offshore drilling contractor. The firm also provides oil field services to the upstream energy players.The company also carries aZacks Rank #1.
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