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Will Crude Cross $50? 5 Energy Picks for October

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Oil prices rallied on Tuesday after the latest short-term Energy Information Administration (EIA) outlook of 120,000 barrels per day drop in U.S. oil production from August to 9 million barrels in September. This is the lowest level since Sep 2014. The optimism was also echoed by the American Petroleum Institute (API) – the largest oil industry association in the U.S.

As a result, investors' hopes were rekindled on oil and the commodity, which showed some early signs of some reversal after losing almost half of its value year over year. And a lower number of domestic rigs revealed by Baker Hughes Inc. for September lent further support to market optimism.

We feel the sinking rig count is a blessing in disguise for the beleaguered energy space. This is due to the simple fact that over the past decade the space has seen a mammoth rise in drilling and production related capacities. This resulted in an invariable rise in production levels. However, a falling rig count clears the path for stability, if not recovery, in prices.

Rebound in the Cards?

Russia’s willingness to meet major oil producers to discuss the present oil market scenario and a rally in U.S. gasoline pricing had a positive impact on global oil prices. Also, the Persian Gulf-based members of the Organization of the Petroleum Exporting Countries (OPEC) feel that the oil market is improving on higher demand for the commodity and a drop in supply growth from non-members.

Meanwhile, back home, a weak jobs report for the month of September raised speculations that the Federal Reserve may become more circumspect about raising rates this year. Lastly, the House of Representatives is widely expected to repeal the 40-year-old ban on exporting crude oil this week itself.

As a result, Tuesday witnessed the Energy Select Sector SPDR (XLE - Free Report) gaining 2.2%. Big oil components ConocoPhillips (COP - Free Report) rose 4.1%, Total SA (TOT - Free Report) increased 3.6%, while both Chevron Corp. (CVX - Free Report) and Royal Dutch Shell plc (RDS.A - Free Report) advanced 3.5% each.

As an immediate outcome, the beleaguered West Texas Intermediate (WTI) crude futures is now trading above the $48 per barrel, reviving market optimism on oil breaching the $50 per barrel mark.

Now What?

The current change in demand-supply dynamics put energy players on the radar of investors long awaiting a lift in the fortunes of the space. So long, the sector was ravaged by falling realizations from upstream operations which dragged down the overall picture.

Now investors can only hope that the decline in the production level does not end up being a mirage. Looking forward, EIA also expects strong growth in global oil demand in 2016. Per the agency, daily demand is expected to rise by 270,000 barrels to 95.2 million barrels in 2016.

Thus we expect upstream stocks to perform well in a period of rising oil prices as investors chase stocks with leverage to oil plays.

5 Stocks Rallying in October

A number of energy stocks saw their prices head north along with an uptrend in the prices of commodities they deal with. Below we highlight five such energy stocks that are gaining in October. Each of these stocks carries a Zacks Rank #2 (Buy).

SandRidge Energy, Inc.

Based in Oklahoma City, OK, SandRidge Energy is an oil and natural gas exploration and production firm. The company’s portfolio also comprises a saltwater gathering and disposal system, a drilling rig and associated oil field services business. The upstream energy operator’s shares shot up roughly 82.6% over the past week. The upsurge came on the back of its move to acquire West Texas natural gas gathering company, Pinon Gathering Co. LLC.

Apache Corp. (APA - Free Report)

Founded in 1954, Apache 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. The Houston, TX-based oil and gas finder – which jumped 21.5% over the past week – has surprised earnings to the upside in each of the last four quarters. What’s more, Apache's recently undertaken restructuring initiatives and cost cutting measures should better its earnings performance in the future.

QEP Resources Inc. (QEP - Free Report)

Another upstream player, Denver, CO-based QEP Resources looks for oil and gas in the Rockies, Williston Basin, Oklahoma, the Texas Panhandle and Louisiana. The company’s diversified reserve base in multiple U.S. basins, focused investment in high-return areas and a competitive cost structure helped it deliver positive surprises in three of the last four quarters, with an impressive average beat of 76.23%. QEP Resources, surged 25.6% over the past one week.

Magnum Hunter Resources Corp.

Irving, TX-based Magnum Hunter Resources Corporation is an independent exploration and production company engaged in the acquisition, development and production of natural gas, natural gas liquids and crude oil, primarily in the States of West Virginia and Ohio. The company is presently active in the Marcellus and Utica shales located in Northwest West Virginia and Southeast Ohio, respectively. The stock, which jumped 55.3% over the past week, has surprised earnings to the upside in three of the last four quarters.

Clayton Williams Energy, Inc.

Located in Midland, TX, Clayton Williams Energy, Inc. is an independent oil and natural gas company with primary operational focus on the Permian Basin, Eagle Ford and East Texas Basin. The company’s activities are primarily located in Texas, Louisiana, and other southern states. The upstream energy operator’s shares shot up roughly 35.9% over the past one week.

Bottom Line

Entering the market at the right time helps to maximize portfolio returns. With an unexpectedly large fall in U.S. production, crude prices have been given a much-needed breather. As such, we believe it will be prudent to start accumulating these stocks at the moment.

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