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OPEC, Allies Agree to Oil Production Cuts: 4 Stocks to Buy

Oil prices rise after a group of the world's largest producers brokered a deal in Vienna, Austria, to curb production.

OPEC has finally put an end to the ongoing speculations regarding oil supply glut and prices with a move to curb output by a total of 1.2 million barrels per day (BPD) from the highs reached in October, essentially for the first half of 2019. While OPEC member countries will reduce output by a total of 800,000 BPD, non-OPEC producers will lower production by 400,000 BPD. The figure is pretty close to the OPEC advisory committee’s suggestion of 1.3 million BPD output-curb from the production levels of October.

Results of the Meeting

The biggest OPEC producer, Saudi Arabia intends to reduce its record October output of 11.1 million BPD to 10.7 million BPD in December, further coming down to 10.2 million BPD in January. Notably, among the OPEC member countries, only Iran, Venezuela and Libya received an exemption from the latest output cuts. Iran’s oil industry is presently suffering due to U.S. sanctions. The situation is expected to worsen in the coming days. Political upheavals, economic turbulence and civil conflict are currently affecting Venezuela and Libya.

Russia, which plays a pivotal role among the non-OPEC countries, will reduce its production by around 230,000 BPD from its October high of 11.4 million BPD. OPEC’s mid-year meeting of 2019 has been rescheduled in April, which is expected to be used for reviewing the state of the oil market and adjust its policies accordingly. It is to be noted that in a similar manner, in early-2017, OPEC and non-OPEC countries capped production to avoid damage due to falling crude prices.

OPEC, together with the non-OPEC nations, controls almost 55% of global supplies and 90% of the proven reserves. Therefore, the outcome of the meeting of the group, informally called OPEC+, is expected to have a significant effect on the market.

Impact on the Market

Oil market investors, who hit the panic mode with prices plunging around 30% in the last two months, can breathe a sigh of relief now. Crude producers around the globe can expect better prices for their product as the output curb is expected to bring down the supply glut in the oil market accompanied by the falling export of Iranian crudes. Producers in the United States, especially those operating in the low-cost shale plays, have enough reasons to be happier now.

The output cut is expected to not only halt falling crude prices but also push prices upward. This will, in turn, keep the exploration and production companies’ profit and cashflow growing. As the supply glut is expected to shrink in the coming days, it will likely provide producers confidence to expand drilling in the coming months. WTI, the American crude benchmark, which touched a low of $50.29 per barrel on Nov 28, is currently trading at $51.76 and is expected to gain in the coming days.

Stocks to Buy

Through screening, we have filtered four stocks for investors, which are poised to reflect the positives from the OPEC meeting outcome. The volume mixes of these companies are biased toward liquids, primarily crude oil, which sets them up for a market beat on an expected gain in crude price.

Oklahoma City, OK-based Chaparral Energy, Inc. CHAP has a significant presence in the state of Oklahoma. Its earnings per share (EPS) for 2019 are expected to grow nearly 50% year over year. The company has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Denver, CO-based QEP Resources, Inc. QEP, with growing focus in the Permian Basin, is expected to record significant profits in 2019. Its EPS for the next year is expected to reflect an increase of more than 700% year over year. Currently it has a Zacks Rank #2.

Another Zacks Rank #2 upstream company, W&T Offshore, Inc. WTI is a leading oil and natural gas explorer with operations primarily focused on resources located off the coast of Gulf of Mexico. Headquartered in Houston, TX, W&T Offshore’s EPS is expected to grow more than 26% in the first quarter of 2019.

Los Angeles, CA-based California Resources Corporation CRC is one of the largest upstream companies in California. Its EPS for 2019 is expected to grow more than 700% year over year. The company currently carries a Zacks Rank #2. 

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