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4 Big Winners from the OPEC Output-Cut Deal

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OPEC and 11 non-OPEC players, including Russia decided on May 25 in the Vienna meeting to maintain the existing production curbs for another nine months. Despite such a move, crude went south as the broader market was expecting deeper cut from the oil producers or at least an extension of the prevailing curb for another 12 months.

Due to the drop in oil prices, refiners stand to gain as their input costs goes down. Hence, investing the same will be judicious.  

Oil Producers Voted to Maintain the Existing Output Cut

On Nov 30, 2016, OPEC signed a landmark deal to curb crude production by 1.2 million barrels per day. Following the cartel, on early December last year, non OPEC players headed by Russia also decided to walk on the same path and lowered oil output by 558,000 barrels per day. Hence, collectively they decided to curb crude production by 1.8 million barrels each day. 

In fact, on Thursday, producers from both the sides voted to extend slash in oil production by the same mark of 1.8 million barrels per day for the coming nine months. All these measures to cut production levels are reflecting oil producer’s best effort to recover oil prices, which is still way below the level during mid-2014.

Crude Went South Despite the Extension

West Texas Intermediate (WTI) crude plunged more than 5% to settle $48.90 per barrel mark on May 25 despite the extension deal. Actually, the traders expected deeper cut from the OPEC members or an extension of the existing curb for at least 12 months. Unfortunately, none of the expectations came true and crude took a beating reflecting that investors are unhappy with the cartel’s decision.

The million dollar question now is – Why did OPEC not make a deeper cut?

Last November’s OPEC deal came into effect on Jan 1, this year. However, there was no immediate impact on worldwide oil inventory levels. Once the cartel members started complying with the terms of the accord, global crude inventories gradually decreased. The decline in inventory levels is even more prominent now.  

Also, U.S oil supplies have been going down for seven consecutive weeks, as per data provided by U.S. Energy Information Administration. The drawdown of U.S inventories might have convinced few OPEC producers that if they can hold the production cut deal a little longer, crude could recover.

Good News for Refining Business

With lower oil prices, definitely the input cost for the refiners went down. In other words, refiners will be able to buy raw crude at decreased prices and in a position to increase their shareholder’s cashflows.

With the help of our proprietary Stock Screener we jotted down four prospective stocks having strong refining presence. The stocks are having have either Zacks Rank #1 (Strong Buy) or 2 (Buy).

4 Stocks to Buy

Headquartered in Brentwood, TN, Delek US Holdings Inc. (DK - Free Report) provides services like oil refining and marketing of petroleum products. The company currently sports a Zacks Rank #1.

Also, Delek’s earnings surprise history is impressive as it beat the Zacks Consensus Estimate in each of the last four quarters with an average positive earnings surprise of 60.68%. Moreover, for 2017, the company will likely witness earnings growth of 96.8%.

Galp Energia SGPS SA (GLPEY - Free Report) – headquartered in Lisbon, Portugal – is an integrated energy company with a strong refining business. Presently, the company carries a Zacks Rank #2.

Also, the Zacks Consensus Estimate for full-year 2017 has been revised upward over the last 60 days.

Headquartered in Vienna, Austria, OMV Aktiengesellschaft (OMVJF - Free Report) is an integrated energy player. The player’s downstream business involves refining, processing and selling of refined petroleum products.

Presently, the company sports a Zacks Rank #1. Moreover, the Zacks Consensus Estimate for full-year 2017 has been revised upward.

Repsol SA (REPYY - Free Report) − headquartered in Madrid, Spain – has both upstream and downstream operations. The refining business comprises refining activities to produce a range of petroleum products.

The company with Zacks Rank #2 has posted an average positive earnings surprise of 46.34%.

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