Oil price has been enjoying a smooth sail for the past couple of months with Brent hovering near $80 per barrel, the highest since 2014, and U.S. crude trading above $72 per barrel. The rally was driven by several factors that are pointing to a rebalancing of the oil market and infusing optimism among investors.
This has pushed the energy stocks higher, making it the best-performing sector so far in the second quarter. In particular, geopolitics and a historic output deal are playing the most important role in driving oil price higher. Below, we have discussed them in detail below:
Venezuela is the latest catalyst given the new sanctions by the Trump administration on the OPEC-member, following the second six-year term victory for president Nicolás Maduro that would further curtail oil output in the country. Output in Venezuela has already been halved since 2005 to below 2 million barrels per day due to an economic crisis.
Donald Trump finally withdrew from the Obama-era 2015 nuclear deal and has vowed to reimpose powerful economic sanctions against the OPEC nation waivered within the deal as well as introduce new ones. Since Iran is OPEC's third-largest oil producer and exports about 2.5 million barrels a day, renewed sanctions would reduce Iranian oil exports, further tightening global supplies.
Historic Output Deal
The historic output cut deal, wherein OPEC, Russia and other producers have agreed to curb production by 1.8 million barrels per day is paying off. The group started reducing production in last January and is poised to continue throughout 2018. As the group restrains crude output for the second year, oil inventories in the world’s richest nations have now fallen 1 million barrels below the five-year average, the level targeted by OPEC and its partners.
Mediocre Demand Outlook
Although accelerating economic growth across the world has been raising demand for the commodity, the International Energy Agency (IEA) warned that it is likely to moderate as crude nears $80 per barrel. The agency cuts its forecast for global demand growth to 1.4 million barrels per day for 2018 from the previous estimate of 1.5 million barrels per day.
Impressive Zacks Rank
The upside to the energy sector is confirmed by a solid Zacks Sector Rank in the top 25% with about 60% of the industries ranking in the top 43%. This suggests continued outperformance in the sector for the coming months.
Energy sector earnings have shown impressive growth of 75.7% in the first quarter, being the largest contributor to earnings growth for the S&P 500. The solid trend is likely to continue into the second quarter with expected earnings growth of 121.1%, representing the highest growth.
Top Stocks to Buy
In view of the reasons discussed above, we strongly believe that investors should consider energy stocks. We have highlighted five stocks having a top Zacks Rank #1 (Strong Buy) with a VGM Score of A or B:
GeoPark Ltd GPRK is an explorer, operator and consolidator of oil and gas. It saw solid earnings estimate revision of 79 cents in two months and has an expected earnings growth rate of 745.16%. GeoPark has a market cap of $959.7 million. You can see the complete list of today’s Zacks #1 Rank stocks here.
HollyFrontier Corporation HFC is engaged in refining petroleum. It produces and markets gasoline, diesel, jet fuel, asphalt, heavy products and specialty lubricant products. With a market cap of $12.9 billion, the stock saw a whopping earnings estimate revision of $1.31 for this year in the last two months and has an expected growth rate of 102.59%.
Anadarko Petroleum Corporation APC is one of the world's largest independent oil and gas exploration and production companies. It has a market cap of $36.3 billion and saw robust earnings estimate revision of 96 cents for this year in the last two months with an expected growth rate of 229.6%.
Wildhorse Resource Development Corporation WRD is an oil and natural gas company focused on the acquisition, exploration, development and production of oil, natural gas and NGL. It saw solid earnings estimate revision of 27 cents in two months and has an expected earnings growth rate of 290.70%. Wildhorse has a market cap of $2.7 billion.
BP p.l.c. BP is the holding company of one of the world's largest petroleum and petrochemicals groups. Their main activities are exploration and production of crude oil and natural gas; refining, marketing, supply and transportation; and manufacturing and marketing of petrochemicals. With a market cap of $156.8 billion, the stock saw positive earnings estimate revision of 47 cents for this year in the last two months and has an expected growth rate of 66.49%.
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HollyFrontier Corporation (HFC) : Free Stock Analysis Report
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