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Oil Slumps Despite Bullish EIA Report, SPR Talks Spoil Sport

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U.S. crude prices finished at their lowest levels in one and a half months on Wednesday, as investors looked past the Energy Information Administration’s ("EIA") bullish weekly report and turned their attention to the possible release of oil from the U.S. Strategic Petroleum Reserve (“SPR”) into the commercial market. On the New York Mercantile Exchange, WTI crude futures lost $2.40 or 3%, to settle at $78.36 a barrel, its worst closing since Oct 7.

In an all-out effort to keep a lid on soaring pump prices, President Biden could reportedly order an emergency drawdown of oil from the SPR for a little relief. The SPR is a massive supply of government crude that is used in unforeseen circumstances. There also seemed to be some rumors that China and the United States might be mulling a joint release of supplies to clamp down on high fuel prices. In fact, it’s the SPR story (or the possibility of more oil) that sent the market lower yesterday despite an encouraging government release.  

Below we review the EIA's Weekly Petroleum Status Report for the week ending Nov 12.

Analyzing the Latest EIA Report

Crude Oil: The federal government’s EIA report revealed that crude inventories fell by 2.1 million barrels compared to expectations of a 2.5-million-barrel decrease per the analysts surveyed by S&P Global Platts. The combination of a surge in exports, uptick in refinery demand and a pullback in production accounted for the stockpile draw with the world’s biggest oil consumer. This put total domestic stocks at 433 million barrels — 11.5% less than the year-ago figure and 7% lower than the five-year average.

On a somewhat bearish note, the latest report showed that supplies at the Cushing terminal (the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange) edged up 216,000 barrels to 26.6 million barrels. It’s worth mentioning that stocks at this major oil hub fell to their lowest level last week since September 2018.

Meanwhile, the crude supply cover was down from 28.8 days in the previous week to 28.5 days. In the year-ago period, the supply cover was 36.1 days.

Let’s turn to the products now.

Gasoline: Gasoline supplies decreased for the sixth week in a row. The 707,000-barrel drop is attributable to higher imports and continued strength in demand. Analysts had forecast that gasoline inventories would fall by 100,000 barrels. At 212 million barrels, the current stock of the most widely used petroleum product is 7% less than the year-earlier level and 4% below the five-year average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) fell for the second week in succession. The 824,000-barrel decrease reflected higher demand and lower production. Meanwhile, the market looked for a supply decline of 1.3 million barrels. Current inventories — at 123.7 million barrels — are 14.2% below the year-ago level and 5% lower than the five-year average.

Refinery Rates: Refinery utilization, at 87.9%, moved up 1.2% from the prior week.

Final Words

Despite yesterday’s SPR-induced fall in prices, the overall Oil/Energy market is well-positioned with a supportive macro backdrop and robust fundamentals. Widespread COVID-19 vaccine rollouts, the ongoing government stimulus and the OPEC+ cartel’s calibrated production policy have contributed to this positive setup.

Crude supplies recently fell to their lowest levels since October 2018, with U.S. commercial stockpiles down some 14% since mid-March. Taking Cushing as an indicator, the oil market has already tightened considerably. Stocks fell to 26.4 million barrels at the key storage hub last week, the lowest in more than three years. There is also a marked improvement in fuel demand on the back of rebounding road and airline travel. In fact, strong consumption of gasoline has pushed inventories to the lowest level in four years.

To take advantage of oil’s robust outlook, one might build a position by tapping into the below-mentioned Zacks Rank #1 (Strong Buy) stocks.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Devon Energy (DVN - Free Report) : Devon is an independent energy company whose oil and gas operations are mainly concentrated in the onshore areas of North America, primarily in the United States. The company’s assets are spread across the key oil assets of Delaware Basin, Eagle Ford, Anadarko Basin and Powder River Basin. DVN’s recent merger with WPX Energy has strengthened its operations in the prolific Permian Basin. The oil and gas finder’s cost management, divestiture of Canadian assets, and completion of the Barnett Shale gas assets sale will allow it to focus on its holdings in four high-quality, oil-rich U.S. basins. DVN’s innovative dividend policy should also attract investors.

The 2021 Zacks Consensus Estimate for Devon indicates 3,777.8% earnings per share growth over 2020. Meanwhile, DVN has seen its shares gain 178.7% since the start of 2021.

Ovintiv (OVV - Free Report) : Formerly known as Encana, Ovintiv is an upstream operator, holding an attractive oil and gas production portfolio in three major North American unconventional basins: Montney, Anadarko and the Permian. Following the Newfield acquisition in 2019, OVV has achieved a higher liquids focus, greater scale and cost synergies. The oil and gas finder has also done a commendable job of cutting its expenses in a disciplined manner, which should boost free cash flow generation.

The 2021 Zacks Consensus Estimate for Ovintiv indicates 1,442.9% earnings per share growth over 2020. OVV, whose shares have gained 141% year to date, is valued at more than $9 billion.

ConocoPhillips (COP - Free Report) : Founded in 1875, Houston, TX-based ConocoPhillips is one of the world’s largest independent oil and gas producers. COP holds a bulk of acres in the unconventional plays of North America. The company’s recent acquisition of 225,000 net acres in the heart of the core Delaware Basin should further boost its position in America’s hottest oil-producing region — Permian.

The 2021 Zacks Consensus Estimate for ConocoPhillips indicates 705.2% earnings per share growth over 2020. COP, whose shares have gained 85.6% year to date, is valued at around $95 billion.

EOG Resources (EOG - Free Report) : It is a top-tier U.S. shale play. The United States accounts for more than 92% of the total production volumes of EOG Resources, with the Eagle Ford and Delaware Basin being the primary contributors. Internationally, EOG has operations in China and Trinidad.

Houston, TX-based EOG Resources, which pays a special dividend along with a regular dividend, should benefit from its attractive growth profile, a huge inventory of drilling opportunities, upper quartile returns and a disciplined management team. The 2021 Zacks Consensus Estimate for EOG indicates 489.7% earnings per share growth over 2020.


In-Depth Zacks Research for the Tickers Above

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Devon Energy Corporation (DVN) - free report >>

ConocoPhillips (COP) - free report >>

EOG Resources, Inc. (EOG) - free report >>

Ovintiv Inc. (OVV) - free report >>