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We are almost at the last leg of 2016, a year that was marked by unprecedented energy market volatility.
The Story So Far
The year started on a disappointing note with crude prices falling to a 12-year low of $26.21 a barrel in Feb as investors worried about the oversupplied market. The commodity’s collapse threatened the industry’s creditworthiness by hurting cash flows, drying up liquidity and pummeling producer profit margins.
However, indications that supply was easing helped oil prices rebound to $50/barrel mark in early Jun. The surge was driven by outages in Nigeria, Libya, Venezuela and Canada – countries that hold some of the world’s major sources of crude. The upward pressure in oil prices also reflected the U.S. Energy Department's inventory releases that showed crude stockpile builds turning into draws. Things were further helped by a continued decline in U.S. crude production.
With factors like Canadian wildfires, Nigerian outages/disruptions, production issues in Venezuela and a strike by Kuwaiti oil workers vanishing from the market, oil slipped back under $40 in the first week of Aug. A glut of refined products also kept the commodity under pressure.
The volatility in oil prices continued with the benchmark touching the $50 threshold again early Oct, buoyed by government figures that continued to show large drawdowns, while investors betted on commitments by Organization of Petroleum Exporting Countries (or OPEC) and non-OPEC players to slash production targets.
When divisions in the cartel became apparent and the future of the ambitious OPEC announcement looked more and more uncertain, the commodity fell back under $45 only to receive a booster shot.
The OPEC Deal
In a bold but not unexpected move, the OPEC cartel agreed on Nov 30 to reduce production starting next month. Seen as a desperate bid to put a floor on falling oil prices, the group – led by Saudi Arabia – promised to take 1.2 million barrels a day out of the market.
OPEC's decision to cut oil production was not totally surprising though the magnitude of reduction were deeper than many analysts had expected. The move aims to trim output to 32.5 million barrels per day -- at the low end of a preliminary agreement struck in September.
Russia, which is not part of the body that pumps a third of the world’s oil, will also join output cuts for the first time in 15 years. The biggest supplier outside the bloc relented from its longstanding position of only freezing production and agreed to cut 300,000 barrels from its record high output of more than 10 million barrels a day.
Oil Prices & Stocks Surge
The OPEC deal had a massive impact on the energy markets, sending crude prices back above $50 a barrel. While the entire sector is roaring higher since the announcement, the independent oil explorers and producers – whose revenues are directly associated with crude price – have been among the best performing stocks. In fact, shares of oil finders like Whiting Petroleum Corp. (WLL), Oasis Petroleum Inc. (OAS) and Marathon Oil Corp. (MRO) have exploded higher and climbed to new multi-month highs.
Certain Factors Still Linger
Despite OPEC’s success in reaching an output deal, the oil sector is by no means out of the woods.
The commodity is facing heat on several other fronts. Perhaps most important pertains to the mounting worries about China’s crude demand. In particular, the Asian giant’s currency devaluation has stoked speculation about soft economic growth in the world’s No. 2 energy consumer.
What’s more, the resilience of North American shale suppliers to keep pumping irrespective of prices and concerns over the effects of Brexit on crude demand means that not much upside is expected in prices in the near term. Moreover, a stronger dollar has made the greenback-priced crude more expensive for investors holding foreign currency. Stronger focus on cleaner energy and weakness in industrial production worldwide are also holding back oil consumption.
As it is, with inventories near the upper limit of the average range for this time of year, crude is very well stocked and it still looks like the commodity is in an environment of excess supply. Therefore, while the OPEC-driven rally is likely to drive up prices by a few dollars, it certainly can’t be termed a seismic event.
Our View
In our view, crude prices in the next few months are likely to exhibit a sideways-to-bullish trend, mostly trading in the $50-$55 per barrel range. As North American supply remains strong and demand looks underwhelming, oil is likely to maintain its low trajectory throughout at least the first half of 2017.
Natural Gas
Over the last few years, a quiet revolution has been reshaping the energy business in the U.S. The success of ‘shale gas’ – natural gas trapped within dense sedimentary rock formations or shale formations – has transformed domestic energy supply, with a potentially inexpensive and abundant new source of fuel for the world’s largest energy consumer.
With the advent of hydraulic fracturing (or "fracking") – a method used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals – shale gas production is now booming in the U.S. Coupled with sophisticated horizontal drilling equipment that can drill and extract gas from shale formations, the new technology is being hailed as a breakthrough in U.S. energy supplies, playing a key role in boosting domestic natural gas reserves. As a result, once faced with a looming deficit, natural gas is now available in abundance.
Prices Fell to 17-Year Lows Earlier in 2016
With production from the major shale plays remaining strong and the commodity’s demand failing to keep pace with this supply surge, natural gas prices hit 17-year lows of around $1.6 per million British thermal units (MMBtu) in the first quarter. The glut was further exacerbated by lackluster industrial requirement over the past few years.
And Then Recovered Strongly
Since then, successive below-average builds on the back of warmer temperature across the country followed by the recent start of the withdrawal season, has been cutting into the year-over-year storage surplus. Statistically speaking, the current storage level – at around 4 trillion cubic feet (Tcf) is up only slightly from last year and is just 6% above the five-year average. As a result, natural gas prices have rebounded strongly and doubled from the extreme lows it hit in Mar. The dramatic recovery has helped the commodity stay above the key psychological level of $3 per MMBtu
The price strength has translated into major gains for natural gas-weighted firms including the likes of Cimarex Energy Co. , Southwestern Energy Co. (SWN - Free Report) and Range Resources Corp. (RRC - Free Report) – all Zacks Rank #3 (Hold) companies – which have popped up 50% or more year-to-date. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Long-Term Thesis Positive
With the early winter turning out cooler than expected, natural gas demand has picked up on the back of elevated power sector consumption due to air-conditioning use. Coupled with the easing production from the major shale plays, natural gas prices are set to rise further.
What’s more, rig count is now languishing below 120 – compared to almost 200 a year ago and the high of 1,606 reached in 2008. Therefore, production growth is unlikely to resume anytime soon.
In general, sentiment toward natural gas is likely to become more positive in the near future as speculators bet on a frigid winter to follow the hot summer.
What the Zacks Industry Rank Indicates
Oil/Energy is one the 16 broad Zacks sectors within the Zacks Industry classification. We rank 265 X industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. (To learn more visit: About Zacks Industry Rank.)
The oil/energy industry is further sub-divided into the following industries at the expanded (aka "X") level: Oil and Gas - Integrated - United States, Oil and Gas - Drilling, Oil and Gas - Exploration and Production - United States, Oil and Gas - Production Pipeline - MLP, Oil and Gas - Field Services, Oil and Gas - Integrated - International, Oil and Gas - Production and Pipelines, Oil and Gas - Mechanical and Equipment, Oil and Gas - Integrated – Canadian, and Oil and Gas - Refining and Marketing.
We put our X industries into two groups: the top half (industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank). Over the last 10 years, using a one week rebalance, the top half beat the bottom half by a factor of more than 2 to 1.
The Zacks Industry Rank is 39 for Oil and Gas - Integrated – Canadian, #56 for Oil and Gas - Mechanical and Equipment, #74 for Oil and Gas - Drilling, #84 for Oil and Gas - Exploration and Production - United States, #95 for Oil and Gas - Integrated - International, #102 for Oil and Gas - Integrated - United States, #145 for Oil and Gas - Production and Pipelines, #155 for Oil and Gas - Production Pipeline – MLP, #171 for Oil and Gas - Refining and Marketing and #176 for Oil and Gas - Field Services.
Early Q4 Predictions Look Positive
As is the trend over the past few quarters, a look back at the Q3 earnings season reflects that the overall results of the Oil/Energy sector were again very weak, dragging down the aggregate growth picture for the S&P 500 index.
Unlike the second quarter, in which oil advanced more than 26% sequentially to notch up the best quarterly percentage gain in seven years, the Jun-Sep 2016 period turned out to be rather flat with crude barely advancing. In fact, the West Texas Intermediate (WTI) crude futures during the third quarter hovered around the $45 per barrel mark, flat with the second quarter and down from $46.50 in the same period last year.
Before discussing Q4 2016 quarter estimates, let’s take a look at this year’s Q3 earnings season. Earnings fell by a whopping 63.3% year over year, following a 79% drop witnessed in the previous quarter. Things have been bad on the revenue front too, which was down 12.9% in the September quarter after declining 24.4% in the previous three-month period.
However, the picture looks rather encouraging for the upcoming Q4 earnings season. This is not surprising, considering that oil scored a big jump on the recent OPEC deal that promises a worldwide cut in production. With estimate revisions going up, the Oil/Energy sector’s earnings are expected to improve 28.3% from the fourth quarter 2015 levels, while the top-line is likely to show a growth of 5%.
For more information about earnings for this sector and others, please read our Earnings Trends report.
The Best Place to Start Your Stock Search
To help you find the most promising stocks in this industry, you are invited to download the full list of 220 Zacks Rank #1 "Strong Buy" stocks – absolutely free of charge. Since 1988, Zacks Rank #1 stocks have nearly tripled the market, with average gains of +26% per year. Plus, you can access the list of portfolio-killing Zacks Rank #5 "Strong Sells" and other private research. See these stocks free >>
See More Zacks Research for These Tickers
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Oil & Gas Industry Outlook - December 2016
Crude Oil
We are almost at the last leg of 2016, a year that was marked by unprecedented energy market volatility.
The Story So Far
The year started on a disappointing note with crude prices falling to a 12-year low of $26.21 a barrel in Feb as investors worried about the oversupplied market. The commodity’s collapse threatened the industry’s creditworthiness by hurting cash flows, drying up liquidity and pummeling producer profit margins.
However, indications that supply was easing helped oil prices rebound to $50/barrel mark in early Jun. The surge was driven by outages in Nigeria, Libya, Venezuela and Canada – countries that hold some of the world’s major sources of crude. The upward pressure in oil prices also reflected the U.S. Energy Department's inventory releases that showed crude stockpile builds turning into draws. Things were further helped by a continued decline in U.S. crude production.
With factors like Canadian wildfires, Nigerian outages/disruptions, production issues in Venezuela and a strike by Kuwaiti oil workers vanishing from the market, oil slipped back under $40 in the first week of Aug. A glut of refined products also kept the commodity under pressure.
The volatility in oil prices continued with the benchmark touching the $50 threshold again early Oct, buoyed by government figures that continued to show large drawdowns, while investors betted on commitments by Organization of Petroleum Exporting Countries (or OPEC) and non-OPEC players to slash production targets.
When divisions in the cartel became apparent and the future of the ambitious OPEC announcement looked more and more uncertain, the commodity fell back under $45 only to receive a booster shot.
The OPEC Deal
In a bold but not unexpected move, the OPEC cartel agreed on Nov 30 to reduce production starting next month. Seen as a desperate bid to put a floor on falling oil prices, the group – led by Saudi Arabia – promised to take 1.2 million barrels a day out of the market.
OPEC's decision to cut oil production was not totally surprising though the magnitude of reduction were deeper than many analysts had expected. The move aims to trim output to 32.5 million barrels per day -- at the low end of a preliminary agreement struck in September.
Russia, which is not part of the body that pumps a third of the world’s oil, will also join output cuts for the first time in 15 years. The biggest supplier outside the bloc relented from its longstanding position of only freezing production and agreed to cut 300,000 barrels from its record high output of more than 10 million barrels a day.
Oil Prices & Stocks Surge
The OPEC deal had a massive impact on the energy markets, sending crude prices back above $50 a barrel. While the entire sector is roaring higher since the announcement, the independent oil explorers and producers – whose revenues are directly associated with crude price – have been among the best performing stocks. In fact, shares of oil finders like Whiting Petroleum Corp. (WLL), Oasis Petroleum Inc. (OAS) and Marathon Oil Corp. (MRO) have exploded higher and climbed to new multi-month highs.
Certain Factors Still Linger
Despite OPEC’s success in reaching an output deal, the oil sector is by no means out of the woods.
The commodity is facing heat on several other fronts. Perhaps most important pertains to the mounting worries about China’s crude demand. In particular, the Asian giant’s currency devaluation has stoked speculation about soft economic growth in the world’s No. 2 energy consumer.
What’s more, the resilience of North American shale suppliers to keep pumping irrespective of prices and concerns over the effects of Brexit on crude demand means that not much upside is expected in prices in the near term. Moreover, a stronger dollar has made the greenback-priced crude more expensive for investors holding foreign currency. Stronger focus on cleaner energy and weakness in industrial production worldwide are also holding back oil consumption.
As it is, with inventories near the upper limit of the average range for this time of year, crude is very well stocked and it still looks like the commodity is in an environment of excess supply. Therefore, while the OPEC-driven rally is likely to drive up prices by a few dollars, it certainly can’t be termed a seismic event.
Our View
In our view, crude prices in the next few months are likely to exhibit a sideways-to-bullish trend, mostly trading in the $50-$55 per barrel range. As North American supply remains strong and demand looks underwhelming, oil is likely to maintain its low trajectory throughout at least the first half of 2017.
Natural Gas
Over the last few years, a quiet revolution has been reshaping the energy business in the U.S. The success of ‘shale gas’ – natural gas trapped within dense sedimentary rock formations or shale formations – has transformed domestic energy supply, with a potentially inexpensive and abundant new source of fuel for the world’s largest energy consumer.
With the advent of hydraulic fracturing (or "fracking") – a method used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals – shale gas production is now booming in the U.S. Coupled with sophisticated horizontal drilling equipment that can drill and extract gas from shale formations, the new technology is being hailed as a breakthrough in U.S. energy supplies, playing a key role in boosting domestic natural gas reserves. As a result, once faced with a looming deficit, natural gas is now available in abundance.
Prices Fell to 17-Year Lows Earlier in 2016
With production from the major shale plays remaining strong and the commodity’s demand failing to keep pace with this supply surge, natural gas prices hit 17-year lows of around $1.6 per million British thermal units (MMBtu) in the first quarter. The glut was further exacerbated by lackluster industrial requirement over the past few years.
And Then Recovered Strongly
Since then, successive below-average builds on the back of warmer temperature across the country followed by the recent start of the withdrawal season, has been cutting into the year-over-year storage surplus. Statistically speaking, the current storage level – at around 4 trillion cubic feet (Tcf) is up only slightly from last year and is just 6% above the five-year average. As a result, natural gas prices have rebounded strongly and doubled from the extreme lows it hit in Mar. The dramatic recovery has helped the commodity stay above the key psychological level of $3 per MMBtu
The price strength has translated into major gains for natural gas-weighted firms including the likes of Cimarex Energy Co. , Southwestern Energy Co. (SWN - Free Report) and Range Resources Corp. (RRC - Free Report) – all Zacks Rank #3 (Hold) companies – which have popped up 50% or more year-to-date. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Long-Term Thesis Positive
With the early winter turning out cooler than expected, natural gas demand has picked up on the back of elevated power sector consumption due to air-conditioning use. Coupled with the easing production from the major shale plays, natural gas prices are set to rise further.
What’s more, rig count is now languishing below 120 – compared to almost 200 a year ago and the high of 1,606 reached in 2008. Therefore, production growth is unlikely to resume anytime soon.
In general, sentiment toward natural gas is likely to become more positive in the near future as speculators bet on a frigid winter to follow the hot summer.
What the Zacks Industry Rank Indicates
Oil/Energy is one the 16 broad Zacks sectors within the Zacks Industry classification. We rank 265 X industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. (To learn more visit: About Zacks Industry Rank.)
The oil/energy industry is further sub-divided into the following industries at the expanded (aka "X") level: Oil and Gas - Integrated - United States, Oil and Gas - Drilling, Oil and Gas - Exploration and Production - United States, Oil and Gas - Production Pipeline - MLP, Oil and Gas - Field Services, Oil and Gas - Integrated - International, Oil and Gas - Production and Pipelines, Oil and Gas - Mechanical and Equipment, Oil and Gas - Integrated – Canadian, and Oil and Gas - Refining and Marketing.
We put our X industries into two groups: the top half (industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank). Over the last 10 years, using a one week rebalance, the top half beat the bottom half by a factor of more than 2 to 1.
The Zacks Industry Rank is 39 for Oil and Gas - Integrated – Canadian, #56 for Oil and Gas - Mechanical and Equipment, #74 for Oil and Gas - Drilling, #84 for Oil and Gas - Exploration and Production - United States, #95 for Oil and Gas - Integrated - International, #102 for Oil and Gas - Integrated - United States, #145 for Oil and Gas - Production and Pipelines, #155 for Oil and Gas - Production Pipeline – MLP, #171 for Oil and Gas - Refining and Marketing and #176 for Oil and Gas - Field Services.
Early Q4 Predictions Look Positive
As is the trend over the past few quarters, a look back at the Q3 earnings season reflects that the overall results of the Oil/Energy sector were again very weak, dragging down the aggregate growth picture for the S&P 500 index.
Unlike the second quarter, in which oil advanced more than 26% sequentially to notch up the best quarterly percentage gain in seven years, the Jun-Sep 2016 period turned out to be rather flat with crude barely advancing. In fact, the West Texas Intermediate (WTI) crude futures during the third quarter hovered around the $45 per barrel mark, flat with the second quarter and down from $46.50 in the same period last year.
Before discussing Q4 2016 quarter estimates, let’s take a look at this year’s Q3 earnings season. Earnings fell by a whopping 63.3% year over year, following a 79% drop witnessed in the previous quarter. Things have been bad on the revenue front too, which was down 12.9% in the September quarter after declining 24.4% in the previous three-month period.
However, the picture looks rather encouraging for the upcoming Q4 earnings season. This is not surprising, considering that oil scored a big jump on the recent OPEC deal that promises a worldwide cut in production. With estimate revisions going up, the Oil/Energy sector’s earnings are expected to improve 28.3% from the fourth quarter 2015 levels, while the top-line is likely to show a growth of 5%.
For more information about earnings for this sector and others, please read our Earnings Trends report.
The Best Place to Start Your Stock Search
To help you find the most promising stocks in this industry, you are invited to download the full list of 220 Zacks Rank #1 "Strong Buy" stocks – absolutely free of charge. Since 1988, Zacks Rank #1 stocks have nearly tripled the market, with average gains of +26% per year. Plus, you can access the list of portfolio-killing Zacks Rank #5 "Strong Sells" and other private research. See these stocks free >>