Following the release of EIA crude inventory numbers, worries about tightening global supplies and uncertainty over the potential impact of Hurricane Florence, oil prices settled at their highest since July 20 on Wednesday. West Texas Intermediate crude for October delivery gained $1.12, or 1.6%, to end the day at $70.37 a barrel in electronic trading.
Bullish EIA News
The federal government’s EIA report revealed that crude inventories fell by 5.3 million barrels for the week ending Sep 7, following a decrease of 4.3 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 2.7 million barrels. Strong refinery throughput and lower imports led to the hefty stockpile draw with the world's biggest oil consumer.
Oil inventories have generally trended lower in a year and a half. In fact, stockpiles have shrunk in 51 of the last 75 weeks and are down more than 135 million barrels since April 2017. The gradual fall has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. At 396.2 million barrels, current crude supplies are 15% below the year-ago figure and 3% under the five-year average.
Most of the monthly price jump could be attributed to United States’ refusal to issue any waivers on cutting crude imports from Iran by Nov 4 when sanctions are introduced against the country’s petroleum sector. In June, President Trump withdrew from a nuclear deal with OPEC’s third-largest producer and subsequently imposed financial sanctions on the Islamic Republic. The November deadline has stoked worries about an expected cut in Tehran’s oil exports – currently at 2.1 million barrels a day – by around one million barrels and lead to a supply shortage in an already ‘tight’ oil market.
The Hurricane Effect
Closing in on the East Coast of the United States, particularly North and South Carolina, Hurricane Florence is expected to make landfall late Thursday or early Friday. Though downgraded to Category 2, the powerful storm will likely lead to heavy rainfall and flooding.
While the hurricane can cause some supply disruptions, there is little in the form of upstream production or refineries that might be impacted. However, potential flooding and loss of power could affect Colonial Pipeline - the largest refined products pipeline system in the United States that runs through North Carolina.
Supportive for Crude Stocks
The bullish data sets sparked widespread buying in energy stocks. In fact, some of the biggest gainers of the S&P 500 were oil and oil-related stocks like Diamond Offshore Drilling Inc. DO, Concho Resources Inc. CXO and Apache Corporation APA.
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.
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.
To guide investors to the right picks, we highlight 4 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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Magnolia Oil & Gas Corporation MGY is an upstream operator in the Eagle Ford Shale and Austin Chalk formations in South Texas. The stock currently has a Zacks Rank #1. In the last 60 days, one earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 70.5% in the same period.
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 #2. In the last 60 days, six earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 40.5% in the same period.
Denbury Resources Inc. DNR is a company that explores for and produces oil and natural gas from properties in the Gulf Coast and Rocky Mountain regions of the United States. The stock currently has a Zacks Rank #2. In the last 60 days, three earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 23.7% in the same period.
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