Crude oil prices have stabilized to some extent in January after plummeting nearly 40% in the fourth quarter of 2018. A massive supply glut and fear of slowing global demand on account of multiple issues were the primary reasons behind the plunge in crude oil prices.
However, crude oil prices received some respite in the form of three primary factors - the decision of OPEC and Russia-led oil exporters to cut production levels, supply related problems in Iran, Libya and Venezuela and positive developments on the trade war front. At this stage, it will be prudent to invest in oil stocks with a favorable Zacks Rank.
Oil Prices Stabilize in January
The U.S. benchmark WTI crude ended 2018 at a price of $44.48 per barrel while the global benchmark Brent crude oil ended 2018 at a price of $51.49. However, oil prices rebounded in January. On Jan 16, WTI closed at $52.07 while Brent crude ended at $61.18. Several oil experts have forecasted that both benchmark prices may move up to 20-30% in 2019.
Positive Developments on Trade War Front
The three-day meeting between mid-level delegations of the United States and China ended on a positive note on Jan 5, although broad-based solutions to tariff conflicts are yet to be reached. This meeting at least laid the foundation for further negotiations to forge a permanent deal in order to resolve the trade disputes between the two largest trading nations of the world.
China has already provided assurance of importing "a substantial amount" of agricultural, energy and manufactured goods and services from the United States. On Jan 16, The Wall Street Journal reported that the U.S. government is contemplating a proposal regarding lifting of some tariffs imposed on China. This will act as an incentive to the Asian economic giant to make deeper concessions to the United States.
Supply Cut on Several Fronts
The OPEC and Russia-led oil exporters have decided to cut crude oil supply by 1.2 million barrels per day (bpd) in 2019. This massive cut will aid in stabilization of oil prices. In a separate development, Qatar decided to quit OPEC in a bid to focus more on natural gas production than crude oil, indicating lower crude oil supply. In December 2018, oil supplies from OPEC nations plunged by 751,000 bpd to nearly 31.6 million bpd.
Fitch Solutions Macro Research Group reported that oil supply from Venezuela will drop a whopping 31.2% in 2019 after falling 29.3% in 2018. Venezuela, once the fourth largest oil producer in the world, is suffering owing to lack of modernization of oil plants.
Oil export from Libya fell by 172,000 bpd to 928,000 bpd in December. Decline in oil supply took place after a group of armed protesters and aggrieved workers took over the country's largest oil field. Likewise, in Iran, oil export dropped by 159,000 bpd to just under 2.8 million bpd owing to the imposition of U.S. sanctions.
Our Top Picks
Crude oil prices are likely to remain northbound in the near term. Consequently, investment in oil exploration and production stocks will be lucrative. We have narrowed down our search to five such firms with a Zacks Rank of # 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows price performance of our five picks year to date.
CNX Resources Corp. CNX is an independent oil and natural gas company which explores, develops and produces oil and natural gas in the Appalachian Basin. The company has expected earnings growth rate of 700% for the current year. The Zacks Consensus Estimate for the current year has improved 7.9% over the past 60 days.
Approach Resources Inc. AREX is an independent energy company focused on the acquisition, exploration, development, and production of unconventional oil and gas reserves in the United States. The company has expected earnings growth rate of 33.3% for the current year. The Zacks Consensus Estimate for the current year has improved 4.2% over the past 60 days.
Bellatrix Exploration Ltd. BXE engages in the acquisition, exploration, development, and production of oil and natural gas reserves in the provinces of Alberta, British Columbia and Saskatchewan in Canada. The company has expected earnings growth rate of 30.7% for the current year. The Zacks Consensus Estimate for the current year has improved 3.1% over the past 60 days.
W&T Offshore Inc. WTI an independent oil and natural gas producer, acquires, explores, and develops oil and natural gas properties in the Gulf of Mexico. The company has expected earnings growth rate of 78.6% for the current year. The Zacks Consensus Estimate for the current year has improved 1% over the past 60 days.
Gran Tierra Energy Inc. GTE engages in the exploration and production of oil and gas properties in Colombia. The company has expected earnings growth rate of 337.5% for the current year. The Zacks Consensus Estimate for the current year has improved 2.9% over the past 60 days.
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