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Can Rising Shale Output Disrupt Oil's Rally? 6 Top Picks

Swarup Gupta

On May 27, oil prices increased more than 1% boosted by geopolitical tensions and the impact of OPEC’s production controls. Only last week, crude prices had suffered their worst weekly losses of the year due to trade tensions and concerns about global growth.

A new report from Morgan Stanley MS states that deflationary factors will keep oil prices low in the long term. The report does acknowledge the impact of supply bottlenecks and geopolitical concerns that have cropped up this year. However, it says that rising U.S. shale supplies will dampen any rise in crude prices.

But the report has a long list of conditions which would have to hold true if crude prices are to remain depressed even in the long term. With geopolitical tensions likely to persist, investing in oil stocks looks like a smart option.

Geopolitical Tensions, Supply Bottlenecks Boost Prices

This has been a particularly good year for crude prices, with WTI crude gaining nearly $15 since the start of 2019. This is primarily due to tight supplies, which in turn is attributable to three different sources.

First, U.S. sanctions have led to a considerable decline in exports from Iran, taking a significant amount of supply off the markets. OPEC’s output controls continue to support prices and are likely to remain in place for the entire year.

Another factor boosting prices is the disruption in supplies from Russia. The country’s crude output has continued to decline in May, per Reuters. This is attributable to a reduction in exports following the detection of contaminated shipments to Europe in April.

Can Rising Shale Output Cap Gains?

However, Morgan Stanley thinks that the success of U.S. shale producers will cap price gains in the longer term. Its freshly released report does agree that growth in output is declining. However, the report suggests that volumes could still increase considerably in the future. Shale producers are using digitization, automation and robotics to slowly but surely boost their output levels.

Further, since shale oil is an abundant resource, costs should decline as the associated technology improves. This in turn could lead cartels like OPEC to cut prices as well in order to effectively compete with their U.S. counterparts.

But the report takes a rather long-term view and is overly optimistic about shale prospects, per market watchers. They point to the fact that breakeven levels have remained unchanged despite the cost savings incurred from the improvement in technology.

Per a report from the Post Carbon Institute, intensive drilling and increases in capacity have only front-loaded production, leaving actual output relatively the same. Even Morgan Stanley’s report assumes that the E&P industry will overcome most operational obstacles, acknowledging that inability to do so would prevent production from reaching its true potential.

Our Choices

The success of U.S. shale has led several leading agencies to predict that crude prices could remain soft in the longer term. However, such an outcome is subject to several caveats. All of these assume that the industry will be able to overcome operational bottlenecks quickly and easily.

Meanwhile, the geopolitical tensions and supply bottlenecks which propelled crude higher this year remain very much in place. This is why it makes good sense to add oil stocks to your portfolio. However, picking winning stocks may be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

We have narrowed down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) and good VGM Score. You can see the complete list of today’s Zacks #1 Rank stocks here.

Apache Corporation APA is one of the world's leading independent energy companies engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids.

Apache has a VGM Score of A. The Zacks Consensus Estimate for the current year has improved by 14.4% over the past 30 days. 

Oasis Midstream Partners LP OMP owns, develops, operates and acquires a diversified portfolio of midstream assets primarily in North America.

Oasis Midstream Partners has a VGM Score of A. The company’s projected growth rate for the current year is 63.7%. The Zacks Consensus Estimate for the current year has improved by 3.3% over the past 30 days. 

Forum Energy Technologies, Inc. FET is a global oilfield products company, serving the subsea, drilling, completion, production and infrastructure sectors of the oil and natural gas industry.

Forum Energy Technologies has a VGM Score of A. The Zacks Consensus Estimate for the current year has improved by 44.7% over the past 30 days. 

Independence Contract Drilling, Inc. ICD provides land drilling services for oil and natural gas producers primarily in the United States.

Independence Contract Drilling has a VGM Score of A. The company’s projected growth rate for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 17.4% over the past 30 days.   

Talos Energy Inc. TALO engages in exploration, development and production of oil and natural gas properties.

Talos Energy has a VGM Score of B. The company’s projected growth rate for the current year is 14.4%.The Zacks Consensus Estimate for the current year has improved by 30.2% over the past 30 days. 

Calumet Specialty Products Partners, L.P. CLMT is a leading independent producer of high-quality, specialty hydrocarbon products in North America.

Calumet Specialty has a VGM Score of B. The company’s projected growth rate for the current year is 13.2%.The Zacks Consensus Estimate for the current year has improved by more than 100% over the past 30 days. 

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Morgan Stanley (MS) : Free Stock Analysis Report
 
Forum Energy Technologies, Inc. (FET) : Free Stock Analysis Report
 
Calumet Specialty Products Partners, L.P. (CLMT) : Free Stock Analysis Report
 
Independence Contract Drilling, Inc. (ICD) : Free Stock Analysis Report
 
Apache Corporation (APA) : Free Stock Analysis Report
 
Oasis Midstream Partners LP (OMP) : Free Stock Analysis Report
 
Stone Energy Corporation (TALO) : Free Stock Analysis Report
 
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