The latest rally in oil prices for the last three months seems to have legs with U.S. crude staying above $50 a barrel lately for the first time in about a year. The reversal in the downing trend of oil prices for the last three months came on the back of drawdown of U.S. crude stock piles and geo-political issues in a key oil producing nation Nigeria.
The rebalancing in the global demand/supply scenario is likely to support crude prices ahead. The latest upbeat forecast by Goldman Sachs for oil has given the commodity a fresh lease of life. Goldman upped the price target for crude oil to $45 per barrel for the second quarter and $50 per barrel for the second half of the year from $35 per barrel and $45 per barrel, respectively, as predicted in March (read: Two Ways to Tap Rising Oil Prices with ETFs).
Favorable Demand-Supply Balance
Core Laboratories’ (CLB - Free Report) CEO David Demshur sees a net decline of about 2.75 million barrels by the end of this year and greater demand of about 1.2 million.In fact, some of the industry experts expect oil to reach $60 by the end of 2016, as per CNBC.
As per The U.S. Energy Information Administration (EIA), U.S. crude output will decline by 830,000 bpd this year to 8.6 million bpd, and by 410,000 bpd to 8.19 million bpd in 2017. On the other hand, EIA upped the projection for U.S. oil demand growth for this year.
Trend of Budget Cut Over?
So far, the plunge in prices has wrecked havoc on the global energy market forcing several companies to reduce capital expenditure or shelve projects. But now this sluggish trend seems to be easing (read: Energy ETFs in Focus as ConocoPhillips (COP) Cuts 2015 Capex).
Expecting a meaningful recovery in industry fundamentals, two industry chief executives recently indicated that crude prices will go on rising this year and some oil companies may resume capital expenditures, as per CNBC.
However, these industry experts noted that several U.S. exploration and production companies are now short of money. So, even if capital expenditure is resumed, it would be by a handful of companies only. Investors should not expect a broad-based activity.
Which Stocks and ETFs to Play?
Investors must be intending to play this likely pickup in spending. For them, we have picked a few stocks with a Zacks Growth Style score of ‘A’ or ‘B’ and Rank #1, (Strong Buy), 2 (Buy) or 3 (Hold) at the time of writing. We have also highlighted the ETFs in which these growth stocks are invested.
Enbridge Inc (ENB - Free Report) – Rank #2; Growth ‘A’
Transcanada Corp (TRP - Free Report) – Rank #3; Growth ‘B’
Tortoise North American Pipeline Fund (TPYP)
The fund puts over 7% weight in each of top three holdings – Transcanada, Spectra Energy Corp (SE) and Enbridge. Among these, TRP and ENB have a Growth score of B and while SE has a score of ‘C’. Several other holdings of the fund have decent Growth scores, making the fund an apt pick (read: Inside Surging MLP ETFs).
Notably, TRP and ENB have heavy weights in other MLP ETFs like Global X MLP & Energy Infrastructure ETF (MLPX) and Alerian Energy Infrastructure ETF (ENFR). SPDR S&P International Energy Sector ETF (IPW) also has considerable focus on these two stocks.
Antero Midstream Partners (AM - Free Report) – Rank #3; Growth ‘B’
Tallgrass Energy Partners – Rank #3; Growth ‘B’
NGL Energy Partners LP (NGL - Free Report) – Rank #3; Growth ‘B’
Global X Junior MLP ETF ()
Investors can tap all the three above-mentioned stocks by investing in MLPJ. AM, TEP and NGL hold about 8.8%, 6.6% and 5.99% in the basket, respectively.
PDC Energy Inc (PDCE - Free Report) – Rank #3; Growth ‘B’
Carrizo Oil & Gas Inc (CRZO - Free Report) – Rank #3; Growth ‘A’
PowerShares S&P SmallCap Energy Portfolio (PSCE)
The small-cap U.S. energy ETF puts 14.33% and 11.8% of weight in PDCE and CRZO, respectively. As much as 25% exposure in growth securities gives the fund a certain growth potential (read: Oil Rally Likely to Continue: ETFs & Stocks to Watch).
RPC Inc. RES) – Rank #3; Growth ‘B’
Patterson-UTI Energy Inc. (PTEN - Free Report) – Rank #3; Growth ‘B’
Diamond Offshore Drilling Inc (DO - Free Report) – Rank #3; Growth ‘A’
SPDR S&P Oil & Gas Equipment & Services ETF (XES - Free Report)
The above-mentioned stocks get places in the top 10 holdings of XES with over 3.7% weight.
Investors can also try investing inPowerShares Dynamic Oil & Gas Services Portfolio (PXJ), putting focus on growth stocks like CLB and DO. Many other stocks of the fund have decent growth scores.
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