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Oil Goes Negative, Tankers to Get a Boost: 3 Stocks to Gain
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Yesterday, West Texas Intermediate oil futures plunged to the negative territory for the first time since the commencement of trading in 1983. It means sellers of the futures contract will have to pay the buyers and not the other way around. The May crude futures contract — which expires today — has witnessed massive abandonment from traders, who are moving on to the June contract. Now, investors are closely monitoring the June contract, which was trading around $20 per barrel. This is the largest contango ever witnessed in U.S. crude, which means that future oil prices in the coming months are above the current prices. Normally, prices are lower at distant delivery dates.
Notably, Brent Crude oil prices have already rolled over to the June contract and are currently trading just above $21 per barrel. Unlike WTI, Brent is not constrained by the requirement of physical delivery.
Why the Plunge?
The logistical limits of the physical oil market resulted in the oil price crash. In other words, as refineries are slowing operations amid weak energy demand due to the coronavirus pandemic, storage capacity is running out fast. In fact, floating storage facilities in offshore tankers has doubled over the past few weeks to record levels, per Reuters. However, production has not declined proportionately. This situation has led to massive crude buildup and now there is too much oil in the market with very little demand, pushing the price to the negative zone.
Economic Data
Global economic data is also reflecting weakness, which puts further pressure on oil and energy demand expectations. The Bundesbank stated that the German economy is in severe recession and coronavirus-related restrictions will reduce the pace of recovery. Last month, exports from Japan declined the most in nearly four years. U.S. bound exports, including cars, from the country also fell drastically due to low market demand.
What to Happen Next?
Analysts are questioning whether a similar oil price situation will be observed during the expiry of the June contract, as the lockdowns in place will keep demand low and supply surplus will likely prevail. The International Energy Agency expects global oil demand to decline 29 million barrels per day (bpd) this month to the lowest level in 25 years. The agency expects global oil demand to fall a massive 9.3 million bpd in 2020. Only a significant demand recovery, which can come in the form of withdrawal of lockdowns and travel bans, can save the situation.
The supply side is expected to witness a massive 9.7 million barrels per day of production cut in May and June from OPEC+, which is a positive sign. However, as demand is not likely to drastically increase, the output curb from OPEC+ would not be that effective. The situation will likely result in an aggressive scaling back of capital spending by upstream energy companies, leading to some job losses.
Lower spending by exploration and production companies is expected to affect oilfield service providers. Halliburton Company (HAL - Free Report) , which recently delivered better-than-expected first-quarter 2020 earnings, expects that the full impact of the coronavirus pandemic and oil price slump will only be felt in the upcoming quarters. The crisis is expected to leave a deeper impact on North American land operations, which will severely decline during the second quarter and be persistently weak throughout the remainder of the year. Consequently, rig count can further decline in the coming days. Notably, Baker Hughes Company (BKR - Free Report) reported that during the first quarter of 2020, U.S. rig count decreased by 77 (from 805 to 728).
Who’s Gaining?
As the producers are fast running out of storage options, and conventional storage facilities are eyeing capacity exhaustion, oil traders are looking for the next best alternative, floating storage. Super tankers, which can store up to 2 million barrels of oil, have witnessed a massive surge in demand in the past few months. Filling up the tankers will also provide the producers with the option of exports to other international markets. As such, we have picked three stocks with favorable ranks and VGM Score that investors can consider amid the current oil price environment. Our research shows that stocks with the combination of a VGM Score of A or B and a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer good investment opportunities.
Bermuda-based DHT Holdings, Inc. (DHT - Free Report) has a Zacks Rank #1 and a VGM Score of B. The Zacks Consensus Estimate for 2020 earnings of $2.11 per share indicates year-over-year growth of more than 270%. The estimate has moved 20% north over the past 30 days.
Frontline Ltd. (FRO - Free Report) , based in Hamilton, Bermuda, has a Zacks Rank #2 and a VGM Score of B. Its earnings growth is projected at 143% for the current year. The Zacks Consensus Estimate for 2020 earnings of $1.99 per share has moved 9.3% upward over the past 30 days.
Teekay Tankers Ltd. (TNK - Free Report) is based in Vancouver, Canada. The company currently has a Zacks Rank #2 and a VGM Score of A.The Zacks Consensus Estimate for 2020 earnings of $7.61 per share indicates year-over-year growth of 300%. The estimate has moved 24% north over the past 30 days.
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2019, while the S&P 500 gained and impressive +53.6%, five of our strategies returned +65.8%, +97.1%, +118.0%, +175.7% and even +186.7%.
This outperformance has not just been a recent phenomenon. From 2000 – 2019, while the S&P averaged +6.0% per year, our top strategies averaged up to +54.7% per year.
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Oil Goes Negative, Tankers to Get a Boost: 3 Stocks to Gain
Yesterday, West Texas Intermediate oil futures plunged to the negative territory for the first time since the commencement of trading in 1983. It means sellers of the futures contract will have to pay the buyers and not the other way around. The May crude futures contract — which expires today — has witnessed massive abandonment from traders, who are moving on to the June contract. Now, investors are closely monitoring the June contract, which was trading around $20 per barrel. This is the largest contango ever witnessed in U.S. crude, which means that future oil prices in the coming months are above the current prices. Normally, prices are lower at distant delivery dates.
Notably, Brent Crude oil prices have already rolled over to the June contract and are currently trading just above $21 per barrel. Unlike WTI, Brent is not constrained by the requirement of physical delivery.
Why the Plunge?
The logistical limits of the physical oil market resulted in the oil price crash. In other words, as refineries are slowing operations amid weak energy demand due to the coronavirus pandemic, storage capacity is running out fast. In fact, floating storage facilities in offshore tankers has doubled over the past few weeks to record levels, per Reuters. However, production has not declined proportionately. This situation has led to massive crude buildup and now there is too much oil in the market with very little demand, pushing the price to the negative zone.
Economic Data
Global economic data is also reflecting weakness, which puts further pressure on oil and energy demand expectations. The Bundesbank stated that the German economy is in severe recession and coronavirus-related restrictions will reduce the pace of recovery. Last month, exports from Japan declined the most in nearly four years. U.S. bound exports, including cars, from the country also fell drastically due to low market demand.
What to Happen Next?
Analysts are questioning whether a similar oil price situation will be observed during the expiry of the June contract, as the lockdowns in place will keep demand low and supply surplus will likely prevail. The International Energy Agency expects global oil demand to decline 29 million barrels per day (bpd) this month to the lowest level in 25 years. The agency expects global oil demand to fall a massive 9.3 million bpd in 2020. Only a significant demand recovery, which can come in the form of withdrawal of lockdowns and travel bans, can save the situation.
The supply side is expected to witness a massive 9.7 million barrels per day of production cut in May and June from OPEC+, which is a positive sign. However, as demand is not likely to drastically increase, the output curb from OPEC+ would not be that effective. The situation will likely result in an aggressive scaling back of capital spending by upstream energy companies, leading to some job losses.
Lower spending by exploration and production companies is expected to affect oilfield service providers. Halliburton Company (HAL - Free Report) , which recently delivered better-than-expected first-quarter 2020 earnings, expects that the full impact of the coronavirus pandemic and oil price slump will only be felt in the upcoming quarters. The crisis is expected to leave a deeper impact on North American land operations, which will severely decline during the second quarter and be persistently weak throughout the remainder of the year. Consequently, rig count can further decline in the coming days. Notably, Baker Hughes Company (BKR - Free Report) reported that during the first quarter of 2020, U.S. rig count decreased by 77 (from 805 to 728).
Who’s Gaining?
As the producers are fast running out of storage options, and conventional storage facilities are eyeing capacity exhaustion, oil traders are looking for the next best alternative, floating storage. Super tankers, which can store up to 2 million barrels of oil, have witnessed a massive surge in demand in the past few months. Filling up the tankers will also provide the producers with the option of exports to other international markets. As such, we have picked three stocks with favorable ranks and VGM Score that investors can consider amid the current oil price environment. Our research shows that stocks with the combination of a VGM Score of A or B and a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer good investment opportunities.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Our Picks
Bermuda-based DHT Holdings, Inc. (DHT - Free Report) has a Zacks Rank #1 and a VGM Score of B. The Zacks Consensus Estimate for 2020 earnings of $2.11 per share indicates year-over-year growth of more than 270%. The estimate has moved 20% north over the past 30 days.
Frontline Ltd. (FRO - Free Report) , based in Hamilton, Bermuda, has a Zacks Rank #2 and a VGM Score of B. Its earnings growth is projected at 143% for the current year. The Zacks Consensus Estimate for 2020 earnings of $1.99 per share has moved 9.3% upward over the past 30 days.
Teekay Tankers Ltd. (TNK - Free Report) is based in Vancouver, Canada. The company currently has a Zacks Rank #2 and a VGM Score of A.The Zacks Consensus Estimate for 2020 earnings of $7.61 per share indicates year-over-year growth of 300%. The estimate has moved 24% north over the past 30 days.
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2019, while the S&P 500 gained and impressive +53.6%, five of our strategies returned +65.8%, +97.1%, +118.0%, +175.7% and even +186.7%.
This outperformance has not just been a recent phenomenon. From 2000 – 2019, while the S&P averaged +6.0% per year, our top strategies averaged up to +54.7% per year.
See their latest picks free >>