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Are U.S. Shale Players Winning the Oil War Against OPEC?

Zacks Equity Research

Crude supply glut has been weighing on commodity prices for over three years now. The intense race between big oil producers vying for market share has been adding to the problem.

Among the key producers, the Organization of the Petroleum Exporting Countries (OPEC) and U.S. shale drillers are noteworthy. We believe that shale players enjoy an edge over the OPEC in the production ramp up race, courtesy of the signing of a historical output cut deal by the cartel. Also, the agreement was extended in May.

How Did Crude Lose Strength?

During the 1990s and early 2000, the U.S. was more dependent on crude import as domestic demand was way higher than the level of oil supply. With the invention of new techniques like hydraulic fracturing and horizontal drilling, U.S. shale producers ramped up oil production considerably.

The shale boom turned the U.S. into an oil-surplus economy from a crude-deficit one. Along with the U.S., the OPEC also pumped more crude. All these led to a supply glut of the commodity, resulting in a price slide since mid-2014.

Weak Oil for Years

Oil prices have not been able to rebound to the levels achieved in the first half of 2014. In fact, it seems almost impossible for the commodity to scale back to the $100 per barrel level.  

The constant race between major oil producers has led to the persistent slump in crude. The picture below clearly shows the downward trend in the commodity from Jun 2014 to Apr 2017. The data provided has been gathered from The U.S. Energy Information Administration.

OPEC Output Cut to Drive Crude?

On Nov 30, 2016, OPEC signed a landmark deal to curtail crude production by 1.2 million barrels a day. Following the cartel, on early December last year, non-OPEC players headed by Russia have decided to lower oil output by 558,000 barrels per day. Hence, the collective cut stands at 1.8 million barrels a day.

In fact, on May 25, producers from both the sides voted to maintain the oil production cut until the end of the first quarter of next year. All these measures are reflective of oil producers’ efforts to drive oil prices, which presently stand way below the mid-2014 level. 

U.S. Shale Players Bank on OPEC Measures

While the OPEC and some major producers like Russia are preparing to maintain the production cut, U.S. shale players have been gathering on oil plays to pump more. This marks an opportune time for the U.S. shale players to bump up production.

Also, given that crude has recovered from last year’s historical low, U.S. drillers will be able to sell the excess commodity at higher prices. The recent weekly rig count report of Baker Hughes Inc. BHI is in support of the gathering of U.S. drillers on crude resources.

We can say that stocks belonging to the Oil & Gas-U.S Exploration & Production industry are likely to benefit the most from these developments. Our proprietary model shows that Bonanza Creek Energy Inc. BCEI, Legacy Reserves LP LGCY and W&T Offshore Inc. WTI are among the upstream companies that are worth a bet right now.

Stocks from the Oil & Gas-Field Services industry – such as Core Laboratories NV CLB, C&J Energy Services Inc. CJ and Flotek Industries, Inc. FTK – are also poised to benefit as they will help upstream companies set up oil wells.

All the stocks from both the industries carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

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