Oil prices are known to be infamously volatile. For instance, the U.S. oil price benchmark, West Texas Intermediate, peaked at above $75 a barrel last October, only to nosedive to mid-$40s three months later, a drop of almost 40% from the top. U.S. oil price, however, soared 32% in the first three months of this year to around $60 a barrel. Now, that marked the biggest quarterly pickup since 2009.
But, what fueled the rebound? The Trump administration’s unexpected move to grant waivers to most of Iran’s buyers resulted in more oil than needed, leading to a plunge in prices. But, OPEC’s policy shift to quickly reduce supplies rebalanced the oil market and helped oil prices pick up. In fact, U.S. oil price is now near the $64-a-barrel mark, holding just below their highest level since last November.
Some skeptics, in the meantime, may say that the recent uptick in U.S. crude stockpiles to 456.6 million barrels last week amid record production will drag oil prices down. Yes! To some extent they may be right. But, in the long run, oil prices will continue to rise.
Oil Price to Zoom Over the Long Run: Here’s Why
Let’s admit, the steepest drawdown in gasoline inventories since September 2017 will overshadow the increase in crude inventory. But, most importantly, OPEC and its allies including Russia’s initiative to trim supplies will go a long way in boosting prices in the near future. Last month, supplies from OPEC fell by half a million barrels a day to a four-year low as Saudi Arabia continues to curb output. Thanks to U.S. sanctions, oil production curbs from Venezuela, exempted from the OPEC cut pact, will also help oil spring higher.
By the way, Libya, an oil exporter, is now close to a full-fledged civil war. Libya had decided to export more oil this month than it had done in any month since the ouster of Moammar Qaddafi. But renewed violence, thanks to the international community recognizing the government of Tripoli’s vows to get rid of Khalifa Haftar’s self-styled Libyan National Army, will put output and exports at risk. This in turn could send oil prices soaring.
Global growth worries were for quite some time having a negative impact on oil prices. However, increasing optimism in U.S.-China trade negotiations seems likely to help global growth pick up. And more growth means more oil consumption.
Both U.S. and Chinese trade officials have begun talks to bring an end to their prolonged trade dispute. These economies imposed billions of dollars of tariffs on each others’ goods over the past year, battering equity markets, souring business and consumer sentiment as well as hampering economic growth.
How to Play Oil’s Revival?
Companies that are involved with hydraulic fracturing for oil were affected the most at the end of last year due to a drop in oil prices. This is because when oil is cheap; unfortunately, their cost structure isn’t alluring and the incentive to pump dries up. But, now with oil prices bouncing back, fracking stocks have made a significant comeback.
For example, when oil approached the $40-a-barrel mark, fracking companies like PDC Energy Inc PDCE and related service stocks like U.S. Silica Holdings SLCA lost more than 35% in the last three months of 2018. So far this year, these companies have gained more than 40% on higher oil prices, and investors should surely want to tap their upward journey.
Of course, rise in oil prices bodes well for oil majors like Exxon Mobil Corporation XOM and Royal Dutch Shell plc RDS.A. But, why Exxon Mobil? This is because the company has stable cash position and its balance sheet is solid when compared to peers. Moreover, it’s a dividend aristocrat as it rewarded stockholders with a 6.3% average annual dividend hike over the past 35 years.
And Royal Dutch Shell because its upstream unit profit has rebounded strongly on oil price recovery. Needless to say, Shell’s $50-billion buyout of BG Group had boosted its global energy business.
Shares of Exxon Mobil and Royal Dutch Shell, in the meantime, have advanced higher than 11% on a year-to-date basis.
While PDC Energy, U.S. Silica and Exxon Mobil currently possess a Zacks Rank #3 (Hold), Shell flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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