Following the release of EIA crude inventory numbers, worries about tightening global supplies and doubts over OPEC’s ability to boost production, oil prices settled at their highest since 2014 on Wednesday. West Texas Intermediate crude for August delivery gained $2.23, or 3.2%, to end the day at $72.76 a barrel in electronic trading - the highest since November 2014.
Bullish EIA News
The federal government’s EIA report revealed that crude inventories fell by 9.9 million barrels for the week ending Jun 22, following a decrease of 5.9 million barrels in the previous week. The analysts surveyed by S&P Global Platts – the leading independent commodities and energy data provider – had expected crude stocks to go down some 2.3 million barrels.
Record refinery throughput and booming exports led to the massive stockpile draw with the world's biggest oil consumer even as domestic production remains at 10.9 million barrels per day – the most since the EIA started maintaining weekly data in 1983.
Oil inventories have generally trended lower in a year and a half. In fact, stockpiles have shrunk in 44 of the last 64 weeks and are down more than 90 million barrels in the past year. The gradual fall has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. At 416.6 million barrels, current crude supplies are 18% below the year-ago figure and 4% under the five-year average.
OPEC Output Agreement, Venezuela and U.S. Curbs on Iran Exports
Apart from the bullish government data, oil prices were also supported by OPEC’s recent plans for a smaller-than-expected output raise. Last week, OPEC agreed to stabilize the market by making modest increase in crude output. At the Vienna meeting, top producers came together and decided to raise volumes by about one million barrels per day from July to make up for falling production in Venezuela. The consensus figure was well below some of the numbers that had been floated ahead of the meeting, while the actual addition is expected to be even lesser – at around 700,000 barrels a day – due to several member countries’ inability to boost exports.
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. Fresh U.S. sanctions on the Maduro regime will further strangle the Latin American nation’s struggling energy sector.
Finally, oil prices were also supported by United States’ refusal to issue any waivers on cutting crude imports from Iran by Nov 4 when sanctions are imposed against the country. Last month, President Trump withdrew from a nuclear deal with OPEC’s third-largest producer and pledged to reimpose sanctions on Tehran. The action has stoked worries about an expected cut in Iranian oil exports – at 2.7 million barrels a day – by around one million barrels and lead to a supply shortage in an already ‘tight’ oil market.
Supportive for Stocks
The federal data sparked widespread buying in energy stocks, which pushed the Energy Select Sector SPDR – an assortment of the largest U.S. energy companies – up more than 1.3% Wednesday. The two energy representatives in the 30-stock Dow Jones industrial average, ExxonMobil XOM and Chevron CVX added 1.3% and 1.5%, respectively. Meanwhile, some of the biggest gainers of the S&P 500 were also oil and oil-related stocks.
An Opportunity to Build a Position in Energy
A steady drawdown of U.S. supplies, healthy demand and ongoing OPEC-led production cuts have driven oil prices higher. Crude has been inching its way back up after falling sharply from $100 a barrel in 2014, to a low of $30 in 2016. The robust fundamental backdrop, which we expect to further strengthen over the course of this year, has brought life back into the sector.
Oil’s recovery to $70 and above, predictably, has had a positive effect on stocks in the sector while positioning certain producers to thrive. During the three-year downturn, oil companies worked tirelessly to cut costs down to a bare minimum and look for innovative ways to churn out more oil from rock. And they managed to do just that by improving drilling techniques. With these efforts, many upstream companies have repositioned themselves to adapt to the new $50-$60 oil reality.
High Quality E&P Names Leading the Way
While all crude-focused stocks stand to gain from the oil rally, companies in the exploration and production (E&P) sector are the best placed, as they will be able to extract more value for their products.
Moreover, the firms boast conservative balance sheets with enough cash on hand and manageable leverage. This provides them ample flexibility to make acquisitions or grow internally. Moreover, driven by operational efficiencies, these entities have been able to reduce unit costs -- an impressive achievement amid the tight realization scenario.
To guide investors to the right picks, we highlight 5 stocks that carry a Zacks Rank of #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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Finally, the chosen ones have VGM Score less than or equal to B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or #2 offer the best upside potential.
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 #1 and a VGM Score of A. In the last 60 days, four earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 33.3% in the same period.
Whiting Petroleum Corporation WLL is a top-tier upstream operator in North Dakota's Williston Basin. The stock currently has a Zacks Rank #1 and a VGM Score of B. In the last 60 days, 15 earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 128% in the same period.
Apache Corporation APA is one of the world's leading independent energy companies engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. The stock currently has a Zacks Rank #2 and a VGM Score of A. In the last 60 days, eight earnings estimates moved north, while two moved south for the current year. The Zacks Consensus Estimate for earnings has risen 38.4% in the same period.
Parsley Energy, Inc. PE is an independent oil and gas exploration & production company, primarily focused on the Permian Basin. The stock currently has a Zacks Rank #2 and a VGM Score of A. In the last 60 days, 15 earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 50.4% in the same period.
Anadarko Petroleum Corporation APC is one of the largest independent oil and natural gas exploration and production (E&P) companies of the world. The stock currently has a Zacks Rank #2 and a VGM Score of A. In the last 60 days, 13 earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 43% in the same period.
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Chevron Corporation (CVX) : Free Stock Analysis Report
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