The energy market has witnessed prolonged crude price weakness since mid-2014 after oil supply surpassed demand. This forced major oil companies’ shares to touch rock bottom. Despite such a scenario all major crude producing countries tried to compete with each other for market share by digging more and more oil instead of cutting production. This led the commodity to slip further.

Finally, we have seen a ray of hope with the latest decision of non-OPEC players to join the production cut with OPEC. This indicates that energy players now want oil to recover from the insufferable 2.5-year pricing pain. 

We call this cooperation an historical event as this is the first time since 2001 that OPEC is successful in convincing crude producers outside the cartel to agree for production cut. Following the news, Brent crude surged to $57.89 a barrel - the highest level ever since Jul 2015. The West Texas Intermediate (WTI) crude is also trading well above the $50 per barrel psychological mark.

Oil Producers Team Up to Cut Output

Non OPEC players have joined hand with OPEC to curb oil production when the market is flooded with plentiful supply of crude. This is arguably the most important step taken by energy players this year to restore oil prices amid the oversupplied commodity market. 

Few days back, OPEC reached a historic accord to lower its production by 1.2 million barrels per day (MMB/D) to 32.5 MMB/D – effective Jan 1, 2017 – from 33.6 MMB/D. Notably, the production cut is much more than what was projected by most analysts. It is to be noted that Saudi Arabia – the most influential member of OPEC – agreed to shoulder most of the output cut.

This time when non-OPEC players agreed to cut production, the market will witness a removal of additional 558,000 barrels per day of crude apart from OPEC’s earlier proposal of 1.2 MMB/D output curb. 

Of the declared amount of non-OPEC cut, 300,000 barrels per day of crude reduction has been shouldered by Russia alone. The country has pledged the bulk amount as it produces much more oil as compared to other countries. Ten other players that also decided to lower output include Oman, Azerbaijan and Sudan. Most importantly, surprising analysts, Saudi Arabia has given an indication of further production cut after the accord with non-OPEC producers.

How the Deal Impact Oil Stocks?

Definitely, the deal is going to lift oil prices which are a positive for upstream oil players engaged in exploration and production activities. This is because the companies will be able to sell the commodity at higher prices and generate significant cash flows for shareholders.

We have employed our proprietary screening methodology to pick two top ranked -- Zacks Rank #1 (Strong Buy) -- stocks in the oil exploration industry that are poised to grow following the recent production cut accord.

Those top ranked players are expected to significantly outperform the broader U.S. equity market over the next one to three months. You can see the complete list of today’s Zacks #1 Rank stocks here.

Headquartered in Midland, TX, Diamondback Energy Inc. (FANG Quick QuoteFANG - Free Report) is involved in the exploitation and development of oil resources in the Permian Basin in West Texas. When the majority of upstream energy players were struggling with the prolonged crude weaknesses, Diamondback came out excellently, beating the Zacks Consensus Estimate in each of the last four quarters posting an average earnings surprise of 74.13%.  

The company also has showed strength in the latest price chart by surpassing the Zacks categorized Oil & Gas-U.S Exploration and Production industry over the prior three months. During the aforesaid period, Diamondback gained almost 17%, while the broader industry improved 15%.

Newfield Exploration Company – headquartered in The Woodlands, TX – is engaged in exploration and production activities of oil acreages in the U.S. The company managed to beat the Zacks Consensus Estimate in three of the last four quarters with an average surprise of 754.83%.

We also expect the company to increase earnings for the current year by nearly 4%. Although Newfield missed the Zacks categorized Oil & Gas-U.S Exploration and Production industry during the above-mentioned period, we strongly believe that the latest union of oil producers to curb crude production will help the company to show price strength in the near term.

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