Oil prices have gained almost 10% since falling to a ten-month low in late June. Plunging to $42 per barrel on June 21 and officially entering a bear market, the commodity was pushed down by the ongoing rebound in U.S. shale production, OPEC’s slow progress toward rebalancing the market and restored output from exempted African producers Libya and Nigeria. Some feared more pessimism ahead with the notoriously-volatile crude’s return to the sub-$30 prices of early last year.
But West Texas Intermediate (WTI) crude futures seems to have come back from the brink and rallied to climb above $45 a barrel.
Crude Spurred by Decline in Oil & Product Stockpiles
Oil’s recent rebound has been fueled by multiple weeks of strong inventory draws in the U.S. crude and gasoline stockpiles.
The nation's oil stockpiles have shrunk in 12 of the last fourteen weeks and the latest decline – of 7.56 million barrels for the week ending July 7 – was its biggest in 10 months. Over the last two weeks, inventories have slumped by 13.9 million barrels, narrowing the five-year average storage surplus down to 103.05 million barrels. Importantly, stocks at the Cushing terminal in Oklahoma – the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange – is currently at 57.56 million barrels, the lowest since November 2015.
Gasoline stocks have also been going down. As per EIA’s latest inventory release, supplies of gasoline were down for the fourth successive week as demand strengthened and imports declined. The 1.65 million barrels draw took gasoline stockpiles down to 235.66 million barrels.
As a result of recent decreases, the existing stock of the most widely used petroleum product has now fallen 1.8% below the year-earlier level. Moreover, implied demand rose 81,000 barrels per day and has averaged 9.711 million barrels per day the last four weeks – above the five-year average for the same period.
It’s this comprehensive decline in oil and product inventories the energy traders have been waiting to see all this while.
But Plenty of Risks Remain
Despite the recent uptick in prices, the sustainability of these gains is highly uncertain as the oil market is still in a lot of trouble.
Arguably, the biggest headwind is the steady climb in U.S. shale production. Last week it rose to 9.40 million barrels per day, the most since July 2015. The biggest development in global oil markets over the last few years, the relentless increase in North American shale output has repeatedly undermined efforts by OPEC and other major producers’ efforts to ‘rebalance’ the market and prop up prices.
Now at a financial equilibrium, the shale firms are putting more rigs and employees back to work. Throughout the downturn, producers worked tirelessly to cut costs down to a bare minimum and look for innovative ways to churn out more oil from rock. And they managed to do just that by improving drilling techniques. With these efforts, many upstream companies have repositioned themselves to adapt to the new $45 oil reality and even thrive at those prices.
Another concern is that despite the Saudi-led OPEC cartel’s best efforts in draining the oil glut through production cuts, the group’s exports are still at fairly high levels that is minimizing the impact of their own curbs.
What Does the Future Hold?
The uncertainty of oil prices means that the future direction of the commodity’s movement is anybody's guess. While we cheer strong inventory draws in the U.S., there are still a host of bearish factors that might induce oil’s fall into the mid-$30s and spell doom for investors.
On the contrary though, the commodity’s recovery to $45, predictably, has had a positive effect on stocks in the sector. In particular, savvy investors might view the price bump as the impetus the stocks need after freefalling for three years. Undoubtedly still a long way to go, but improving crude prices may have already primed certain oil producers and linked entities for upward momentum.
Play It Smart
But it’s important to keep in mind that even in these tumultuous times, there are some stocks that stands out.
Amid the uncertainty, it is necessary that investors adopt a cautious approach. It is prudent to opt for large cap stocks. These have a market capitalization of over $10 billion, and also have further room for upside. These companies enjoy leading market positions, have a global footprint, strong cash positions and are large enough to stay strong even in the face of unfavorable events.
To guide investors to the right picks, we highlight 5 stocks that carry a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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The first such stock is Calgary, Alberta-based Canadian Natural Resources Ltd. (CNQ - Free Report) . The company is engaged in the acquisition, development and exploitation of crude oil and natural gas properties. Canadian Natural Resources’ core operations are focused in western Canada, the United Kingdom sector of the North Sea and offshore West Africa.
Zacks Rank #1
Market Capitalization: $33 billion
The second pick, Suncor Energy Inc. (SU - Free Report) , Canada’s premier integrated energy company. Suncor's operations include oil sands development and upgrading, conventional and offshore crude oil and gas production, petroleum refining, and product marketing under the Petro-Canada brand.
Zacks Rank #2
Market Capitalization: $49 billion
Houston and London-based Baker Hughes, a GE Company (BHGE - Free Report) is also on our radar. It is one of the largest providers of oilfield services in the world, offering a variety of equipment, maintenance, and engineering and construction services to the global oil and gas industry.
Zacks Rank #2
Market Capitalization: $16 billion
We advise investors to add Petrobras (PBR - Free Report) – the largest integrated energy firm in Brazil and one of the largest in Latin America. The company’s activities include: exploration, exploitation and production of oil from reservoir wells, shale and other rocks, as well as refining, processing, trading and transportation of oil and oil products, natural gas and other fluid hydrocarbons, in addition to other energy-related activities.
Zacks Rank #2
Market Capitalization: $55 billion
Finally, we have Repsol S.A. (REPYY - Free Report) . Repsol is Spain’s largest energy company, which is engaged in oil and gas exploration and production, refining and marketing of petroleum products, and other energy-related businesses.
Zacks Rank #2
Market Capitalization: $23 billion
While there are ample reasons to be cautious, there is still enough room to make money in energy stocks, if one focuses on the right companies. In particular, large-cap stocks with a favorable Zacks Rank prove to be attractive options for investment.
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