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Oil's Steepest Monthly Fall in a Decade: OPEC to the Rescue?

Will oil continue to be in bear territory? The consensus from the 175th OPEC meet in Vienna, Austria, will probably answer this.   

The Organization of the Petroleum Exporting Countries (OPEC) is gearing up to meet its allies, led by Russia, on Thursday and Friday. Many analysts expect major producers to cut oil output as the pricing scenario of the commodity is weak, thanks to swelling global supplies and soft demand outlook on fears of economic slowdown.  

Crude Plunges 22% in November

West Texas Intermediate (WTI) crude plummeted almost 22% through November, marking the steepest monthly decline since October 2008.

Surprisingly, this record monthly fall came after the commodity traded at $76.40 per barrel in October, the highest price since November 2014. The sudden drop in prices was upsetting for investors who expected black gold to reach $100 a barrel.

OPEC’s Likely Production Cut

With crude in the bear territory, there is a need for oil production cut, said current president of the cartel — Suhail al-Mazroui. In fact, the energy minister of U.A.E showed confidence that the key producers of oil will agree on a production cut.

Following a meeting with Mohammed Bin Salman — the crown prince of Saudi Arabia — Russian president Vladimir Putin commented on Saturday about his decisions to extend efforts to address the imbalance in the oil market through 2019. However, none of the parties commented on the volume to be cut.

Media reports claimed that the technical advisers of OPEC made a recommendation to cut daily production by 1.3 million barrels through next year. However, sources added that Russia is willing to cut smaller volumes.

Which Energy Firms Will Benefit?

Most of the shale plays in the domestic market have the break-even oil price at significantly below $50, per a presentation by Pioneer Natural Resources Company PXD. The break-even crude price for several domestic resources — like Permian, Eagle Ford and Bakken — is even below $30. The break-even oil price for deepwater drilling has also dramatically decreased to $30 a barrel, Royal Dutch Shell plc RDS.A told Financial Times.

Moreover, energy research and consulting group Wood Mackenzie’s analysis revealed that derivatives contracts on average protected 45% of the U.S. drillers’ — only those firms employing derivative contracts — 2018 liquid production and 25% of next year’s output. The consulting firm added that the firms have set their hedging in such a way that they will benefit when crude drops below $56 per barrel. Hence, the derivative contracts are insulating the companies as oil hovers around $50.

Given the hedging program and low break-even oil price of key U.S. shale and deepwater resources, upstream energy players are immune, to some extent, if the consensus in the Vienna meeting goes against production cut. Needless to say, vote in favor of production cut — that is most likely — will be a boon for producers as their fate is directly related to oil price.  

Oil Stocks in Focus

With the aforesaid positives, we have selected four stocks that have a Zacks Rank #2 (Buy) or 3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Headquartered in Houston, TX, W&T Offshore, Inc. WTI has a strong presence across the resources located off the coast of Gulf of Mexico. The #2 Ranked firm has employed hedging program to brave the volatile commodity pricing environment.

With presence in the Bakken play, Whiting Petroleum Corporation WLL, with a Zacks Rank of 3, has placed more than 60% of 2018 liquid production under hedging program, according to the energy consulting group.

Concho Resources Inc. CXO, among the leading oil producers in the prolific Permian Basin, has hedged more than 80% of its 2018 liquid production and more than 60% of 2019 output — according to Wood Mackenzie’s data. The company presently has a Zacks Rank #3.

Headquartered in Plano, TX, Denbury Resources Inc. DNR, with a Zacks Rank of 3, has employed oil price derivative contracts to hedge more than 60% of 2018 liquid production and close to 60% of 2019 output, per the energy consulting group.

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Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
W&T Offshore, Inc. (WTI) : Free Stock Analysis Report
Denbury Resources Inc. (DNR) : Free Stock Analysis Report
Concho Resources Inc. (CXO) : Free Stock Analysis Report
Whiting Petroleum Corporation (WLL) : Free Stock Analysis Report
Pioneer Natural Resources Company (PXD) : Free Stock Analysis Report
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