Oil prices moved to the $50 threshold Thursday as government figures showed a draw in crude stocks for the fifth straight week and investors clung on to optimism generated by a decision from the world's largest oil cartel to slash production targets.
Riding the bull run, West Texas Intermediate crude for Nov delivery gained $1.14, or 2.3%, to settle at $49.83 a barrel in electronic trading yesterday – the best since Jun 29.
OPEC Agreement: The Organization of Petroleum Exporting Countries (OPEC), whose member nations supply around 40% of the world's crude, said it would cut production by as much as 750,000 barrels a day starting in November in order to keep oil prices from falling further. Most industry observers didn’t have high expectations from the meeting.
OPEC's decision to cut oil production – made in a meeting in Algiers last Wednesday, Sep 28 – took most analysts by surprise. The move, led by Saudi Arabia, aims to trim output to 32.5-33.0 million barrels per day from the current 33.5 million barrels per day.
Bullish EIA Numbers: The U.S. Energy Department's inventory release showed that crude stockpiles declined for the fifth straight week, continuing to drag down the overall surplus.
The federal government’s EIA report revealed that crude inventories fell by 2.98 million barrels for the week ending Sep 30, 2016, following a decline of 1.88 million barrels in the previous week.
The analysts surveyed by S&P Global Platts – the leading independent commodities and energy data provider – had expected crude stocks to go up some 2 million barrels. A drop in imports and production led to the surprise stockpile draw with the world's biggest oil consumer even as refinery activity slowed.
Following the fifth straight inventory reduction, the year-over-year storage surplus has narrowed down considerably.
Supportive for Stocks
Year-to-date, ‘The Energy Select Sector SPDR’ has gained an impressive 17.56%, easily outperforming the broad-based Dow Jones Industrial Average and the S&P 500 index, which gained just 4.91% and 5.67%, respectively. Most major oil stocks – including mega-caps Exxon Mobil Corp. (XOM - Analyst Report) , Chevron Corp. (CVX - Analyst Report) and Royal Dutch Shell plc (RDS.A - Analyst Report) – relocated in the green with gains of 11.61%, 13.64% and 12.49%, respectively.
There’s Still Room for Upside
It's true that record high inventories and tepid demand growth could still push the commodity to the depths of multiyear lows. But signs are emerging that oil prices are likely to stabilize and gradually pick up. Not only is global demand expanding but energy companies have significantly scaled back on plans to explore for and bring out more oil. This should lead to lower future production and supply/demand rebalancing.
Secondly, while analysts remain deeply skeptical that the OPEC output curb would be carried through, the early reaction in energy stocks has been positive. Oil prices have jumped more than 10% since the members’ meeting in Algeria, and should the ministers agree on production levels in Nov, even higher prices are a likely outcome.
Even as we cannot run down the chances of the market moving sideways and seeing high volatility, many analysts are not too bearish about oil in the remainder of 2016. In fact, some industry observers are of the view that crude prices would break through $50-per-barrel yet again before then year-end.
Look for Bargain Buys with Strong Fundamentals
If investors are eager to lap up opportunities, a prudent move would be to buy the beaten-down stocks with encouraging fundamentals. Stressed valuations do not always indicate that the stock has lost all potential. In fact, some could actually make a great buy. But prospective investors need to do adequate research before betting one’s hard-earned money on such stocks.
To guide investors to the right picks, we highlight 5 stocks that carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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The stocks, which we shall cherry-pick, currently come at a bargain price after declining at least 15% in the first 9 months of the year, but have the potential to turn around in the fourth quarter.
5 Stocks to Invest In
Par Pacific Holdings Inc. (PARR - Snapshot Report) : Par Pacific Holdings, Inc., based in Houston, TX, is a diversified energy player that operates in 4 segments: Refining and Distribution, Retail, Commodity Marketing and Logistics, and Natural Gas and Oil.
Zacks Rank: #1
% Price Change (YTD): -39.38%
Basic Energy Services Inc. (BAS - Snapshot Report) : Founded in 1992, Fort Worth, TX-based Basic Energy Services is a top provider of well servicing rigs and equipments.
Zacks Rank: #2
% Price Change (YTD): -72.99%
Weatherford International plc (WFT - Analyst Report) : Switzerland-based Weatherford International is a leading oilfield services company. It manufactures and provides equipment and services for drilling, completion, and production of oil and natural gas wells.
Zacks Rank: #2
% Price Change (YTD): -31.94%
W&T Offshore Inc. (WTI - Snapshot Report) : An exploration and production company headquartered in Houston, TX, W&T Offshore focuses primarily in U.S. Gulf of Mexico’s shallow water shelf.
Zacks Rank: #2
% Price Change (YTD): -27.27%
Comstock Resources Inc. (CRK - Analyst Report) : Frisco, TX-based Comstock Resources, Inc. is an independent oil and gas exploration and production company engaged in the acquisition, exploration, and development of oil and gas properties. The company’s operations are concentrated primarily in two regions in the U.S.: East Texas/North Louisiana and South Texas.
Zacks Rank: #2
% Price Change (YTD): -18.50%
The greatest opportunities could be found by buying fundamentally sound stocks when everyone is selling them.
Where Do Zacks' Investment Ideas Come From?
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