A cut in global oil output initiated by OPEC and other major oil producers, including Russia, has helped prices more than double from the collapse in early 2016. Venezuela’s production woes drove the rally as well.
Now, an impending decision to impose economic sanctions on Iran, the world’s fifth-largest producer of crude oil last year, by the United States is propelling oil prices further. Investors worry that sanctions on Tehran will adversely impact supply that is now in a tight position. Meanwhile, the world’s appetite for oil continues to climb buoyed by robust economic growth.
Benchmark prices for U.S. crude oil touched $70 a barrel on May 7 for the first time in four years, while the rising tide pushed the international benchmark, Brent crude, beyond $75. Oil’s ascent to new highs pushed shares of energy companies. Oil companies are already expected to come up with promising results this earnings season. Hence, investing in some of the sought-after oil majors doesn’t seem to be a bad proposition.
Here are the primary reasons for the oil resurgence:
Sanctions on Iran to Lift Oil Prices
President Trump has tweeted that he will announce his decision on the Iran deal from the White House at 2 pm on May 8. Trump has openly criticised the 2015 Iran nuclear deal, which permitted Iran to export more crude provided the nation restricted its nuclear activities.
If Trump opts to reimpose sanctions on Iran then it could reduce the nation’s crude supply by as much as 200,000-300,000 barrels per day (bpd), per RBC Capital Markets. Lest we forget, Iran’s oil output had surged almost 4 million bpd since a group of world powers eased sanctions on its nuclear program.
In the run-up to the U.S. decision, Israeli Prime Minister Benjamin Netanyahu added spice. He claimed that he has evidence that the nuclear deal was nothing but fabrications and Iran was hiding nuclear-weapons program. Trump agreed that Netanyahu’s claims corroborated his own view.
Analysts opine that if sanctions are reintroduced, oil prices will rise by $5 to $10 a barrel.
OPEC Led by Saudis Curb Oil Production
The OPEC/NON-OPEC accord aims at limiting oil production. The deal was initiated last year wherein OPEC and other major oil producers like Russia agreed to trim crude output by nearly 1.8 million bpd from late 2016 levels. The primary reason for the deal was to put a check on the global supply glut.
OPEC’s crude production in April, in fact, dropped for the third straight month to a one-year low, according to an OPEC survey recently conducted by S&P Global Platts. OPEC was able to produce 32 million bpd last month, down 140,000 bpd from the prior month.
Venezuela Output Woes
Venezuela recently saw a massive drop in production levels as it continues to struggle with political and economic crisis. Venezuela produced 1.41 million bpd in April, down 80,000 bpd from March. It also marked a 540,000 bpd fall from a year ago, per Platts survey.
Platts added that current Venezuela output is at the lowest level in 30 years and the nation’s miseries “have been well documented, as its barrel count has fallen in every month since February 2016.”
Demand Keeps Climbing
Oil consumption continues to climb, courtesy of higher economic growth. As per the International Energy Agency (IEA), global oil demand this year is expected to come in at 99.3 million bpd, up from 97.8 million bpd last year.
The agency, in the meanwhile, is concerned that Trump’s plan to impose tariffs on Chinese imports and Beijing’s retaliatory measures might weigh on global economic growth. This in turn may hamper demand for oil. The IEA estimated that if global growth declines 1%, oil demand growth will fall 690,000 bpd.
But, we all know that the world’s two largest economies do not want a full-blown trade war despite the tit-for-tat tariff threats. After all, a trade war is a big worry for corporate America as its profits will be hurt if trade restrictions are imposed. It may also deal a heavy blow to economies, resulting in widespread unemployment. Thus, it can be safely concluded that oil consumption will continue to remain at elevated levels.
5 of the Best Energy Stocks to Buy Now
Given the aforesaid positives, oil is now expected to trade at around $70 a barrel, pushing shares of energy companies northward. The energy sector of the S&P 500 is up 2.3% so far this year.
The highest year-over-year earnings growth is also likely to be recorded in the energy sector, which is expected to surge 73.9% from the same period last year on 14.4% higher revenues. Among the sub-sectors, oil and gas exploration and production; oil and gas refining and marketing; oil and gas equipment and services; and oil and gas drilling companies are positioned to record solid growth. Uptick in oil prices is mostly cited to be the reason for the elevated expectations.
We have, thus, selected five solid energy stocks that can make the most of this bullish period. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Evolution Petroleum Corporation (EPM - Free Report) is an independent oil and gas company that engages in the acquisition, exploitation, and development of properties for the production of crude oil and natural gas, onshore in the United States. Currently, the stock has a Zacks Rank 2. To top it, investors have seen two earnings estimates move higher, compared with none lower, at least when looking at the current-year time frame. And the consensus estimate for the company’s earnings has increased 2.2% over the past 60 days. The company’s expected earnings growth rate for the current year is 84%, way higher than the industry’s projected gain of 23.6%.
Pioneer Energy Services Corp. (PES - Free Report) provides land-based drilling and production services to oil and gas exploration and production companies in the United States. The company currently has a Zacks Rank 2. Moreover, investors have seen three earnings estimates move higher, compared with none lower, at least when looking at the current-year time frame. And the consensus estimate for the stock’s earnings has moved 34% up in the past 60 days. The company’s expected earnings growth rate for the current quarter is 57.1%, in contrast to the industry’s projected decline of 55.9%.
Oasis Midstream Partners LP (OMP - Free Report) provides crude oil, natural gas, and water-related midstream services in North America. The stock currently has a Zacks Rank 2. To top it, investors have seen two earnings estimates move higher, compared with none lower, at least when looking at the current-year time frame. And the consensus estimate for the company’s earnings has increased 3.9% over the past 60 days. The company’s expected earnings growth rate for the current year is 337.2%, way higher than the industry’s projected gain of 3.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Nine Energy Service, Inc. (NINE - Free Report) operates as an onshore completion and production services provider that targets unconventional oil and gas resource development in North America. It operates in two segments, Completion Solutions and Production Solutions. The company currently has a Zacks Rank 1. Furthermore, investors have seen three earnings estimates move higher, compared with none lower, at least when looking at the current-year time frame. And the consensus estimate for the stock’s earnings has surged 33.9% in the past 60 days. The company’s expected earnings growth rate for the next year is 116.7%, way more than the industry’s projected gain of 34.7%.
Rice Midstream Partners LP (RMP - Free Report) owns, operates, develops, and acquires midstream assets in the Appalachian Basin. The stock currently has a Zacks Rank 2. To top it, investors have seen two earnings estimates move higher, compared with none lower, at least when looking at the current-year time frame. And the consensus estimate for the company’s earnings has risen 8.6% over the past 60 days. The company’s expected earnings growth rate for the next year is a solid 14.7%, and 14% compounded annually over the next five years.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>