Crude oil prices, which plunged in the fourth quarter of 2018, have rebounded significantly in 2019. In the first quarter of 2019, oil prices recorded the best quarterly gain since 2009 and best first-quarter gain since 2002.
Moreover, on Apr 8, crude oil prices reached the highest level in five months. The U.S. benchmark West Texas Intermediate (WTI) crude gained $1.32 or 2.1% to close at $64.40 a barrel, its highest since Nov 1, 2018. The global benchmark Brent crude rose 76 cents or 1.1% to $71.10 a barrel, its highest since Nov 7, 2018. Year to date, prices of WTI crude and Brent crude are up 41.8% and 40.6%, respectively.
Supply Shortages Boost Oil Prices
OPEC and Russia-led oil exporters decided to cut crude oil supplies by 1.2 million barrels per day (bpd) in 2019. On Mar 11, per a Reuters report, Saudi Arabia’s energy minister Khalid al-Falih said that the country will keep its oil production below $7 million bpd in April, much lower than Saudi’s previous estimate of 10 million bpd.
On Jan 28, the U.S. government announced sanctions on Venezuela. According to the International Energy Agency (IEA), Venezuela’s crude output is likely to decline from 1.3 million bpd in 2018 to 750,000 bpd in 2019 owing to U.S. sanctions. Moreover, oil export dropped by 159,000 bpd to just under 2.8 million bpd in Iran owing to the imposition of U.S. sanctions.
Meanwhile, a full-scale civil-war has started in Libya, and U.S. military has decided to pull out a small contingent of forces from that country. Breakout of civil-war will significantly disrupt global oil supply in the near future. Per Bloomberg, Libya’s crude production came in at a significant 1.1 million barrels a day in March.
Near-Term Concerns for Oil Price Momentum
Russia has started putting pressure on OPEC and its allies to level off crude oil production from June. OPEC and Russia led oil allies will meet next month to take a crucial decision regarding the continuation of the self-imposed output quota.
Both Russia and the United States are firing on all cylinders to increase crude oil production. Russian oil production reached a record high of 11.16 million bpd in 2018. Crude oil output from the United States came in at a record high of 12.2 million bpd in March 2019. Per energy consultancy FGE, U.S. oil export is likely to go up by 500,000-600,000 bpd from July buoyed by the installation of new Permian pipelines.
Fears of global economic slowdown will resurface again if the United States and China fail to resolve their year-old trade dispute within April or by mid-May. Rating agency Moody’s Investor Services reported that tariffs imposed by the U.S. government on Chinese goods have already reduced global demand for crude oil.
Rosy Future Despite Concerns
On Mar 11, the IEA projected that global crude oil demand will remain firm at least up to 2024 although the rate of demand growth will decline. By this time, oil demand will rise by 7.1 million bpd.
Despite a surge in sales of electric car and massive oil exploration in the United States, soaring demand for oil for the petrochemical industry, especially for plastic and growing demand for aviation oil will support crude oil prices.
Moreover, robust U.S. job data and manufacturing data in March as well as a rebound on China’s manufacturing PMI in March will help oil prices to remain firm in the near term. A solution to the U.S.-China trade dispute will be a major boost for the world economy.
At this stage, investment in stocks engaged in exploration, production, refining and marketing of oil will be lucrative. We narrowed down our search to five stocks with either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks year to date.
Cabot Oil & Gas Corp. COG an independent oil and gas company that explores, exploits, develops, produces and markets natural gas, oil, and natural gas liquids in the United States. It sports a Zacks Rank #1. The company has an expected earnings growth rate of 68.1% for the current year. The Zacks Consensus Estimate for the current year has improved 8.1% over the last 60 days.
Chaparral Energy Inc. CHAP engages in the acquisition, exploration, development, production, and operation of onshore oil and natural gas properties primarily in Oklahoma. It carries a Zacks Rank #2. The company has an expected earnings growth rate of 41.9% for the current year. The Zacks Consensus Estimate for the current year has improved 214.3% over the last 60 days.
Devon Energy Corp. DVN an independent energy company primarily engages in the exploration, development, and production of oil, natural gas, and natural gas liquids in the United States and Canada. It carries a Zacks Rank #2. The company has an expected earnings growth rate of 24% for the current year. The Zacks Consensus Estimate for the current year has improved 2.5% over the last 60 days.
NGL Energy Partners LP. NGL engages in crude oil logistics, water solutions, liquids, retail propane, and refined products and renewables businesses. The company has an expected earnings growth rate of 281.5% for the current year and a Zacks Rank #1. The Zacks Consensus Estimate for the current year has improved 43.1% over the last 60 days.
Phillips 66 Partners LP. PSXP operates, develops, and acquires crude oil, refined petroleum products, and natural gas liquids (NGL) pipelines, terminals, and other transportation and midstream assets. The company has an expected earnings growth rate of 10.3% for the current year and carries a Zacks Rank #2. The Zacks Consensus Estimate for the current year has improved 7% over the last 60 days.
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