Oil prices surged on May 30, following a report by Reuters that Saudi Arabia, other OPEC (Oil and Petroleum Exporting Countries) countries, and non-OPEC allies led by Russia are likely to abide by a global pact on cutting oil supplies until the end of 2018. However, oil producers will make gradual adjustments in the event of any supply disturbances.
Notably, oil prices have been plummeting of late following the news that OPEC and Russia are planning to increase crude oil production by 1 million barrels a day to neutralize the effect of shortfall of oil production from Iran and Venezuela.
The news of OPEC countries and Russia’s intention to follow the global pact finally brought relief to oil prices which rallied yesterday reversing the price slump in last five days. At this stage, investment in energy stocks engaged in oil production, refining and marketing will be a lucrative option.
Oil Prices Recover
Oil took a breather from its week-long rout as concerns over higher OPEC production eased. WTI crude rose $1.48 or 2.2%, to settle at $68.21 a barrel on the New York Mercantile Exchange. This was WTI’s highest gain in three weeks, after losing almost 8% in five sessions.
Brent futures for July settlement rose $2.11 to end the session at $77.50 a barrel on the London-based ICE Futures Europe exchange. The global benchmark crude traded $9.29 higher than the WTI. Likewise, July Brent oil, the international benchmark was up $2.11 or 2.8%, to end at $77.50 a barrel on ICE Futures Europe.
Oil Production Likely to Remain Stable in 2018
At present, Venezuela and Iran are the major supply disturbances. Economic instability in Venezuela, its massive debt load, unrest in the workforce and hyperinflation will take severe toll on the country’s oil production till the end of 2018.
However, problems related to Iran started after the United States withdrew from the nuclear pact and plans to re-impose oil sanctions on it. However, growing support and solidarity among other countries toward the nuclear deal may neutralize the effect of U.S. sanctions as Iran is likely to sell oil to several European and Asian countries.
Moreover, several industry experts firmly believe that OPEC will try to compensate the shortage originating due to Venezuela or Iran. However, the largest oil production body will keep the international oil production level intact.
Goldman Sachs stated that global oil inventories have already returned to its five-year average. However, demand for oil is very strong and growing. Moreover, shortfall from Venezuela and infrastructure bottlenecks in the Permian is likely to result in low production in the United States. This will add more to supply shortages. In such a situation, even if OPEC decides to increase production it will only just compensate the shortage and not result in a production glut.
Our Top Picks
Strong international demand for crude oil, a tight global oil inventories and stabilization of oil production level will boost oil price rally in the near term. Consequently it will be a prudent move to invest in good energy stocks. However, picking winning stocks can be a difficult task.
This is where our VGM Score comes in Handy. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select the winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) and a good VGM Score. You can see the complete list of today’s Zacks #1 Rank stocks here.
Chart below depicts price performance of our five picks in the last three months.
BP p.l.c. (BP - Free Report) headquartered in London, the company is one of the world's largest petroleum and petrochemicals chain. Their main activities are exploration and production of crude oil and natural gas; refining, marketing, supply and transportation as well as manufacturing and marketing of petrochemicals.
BP has a VGM Score of A. It has expected earnings growth of 67.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 9.4% over the last 30 days.
CVR Refining LP (CVRR - Free Report) headquartered in Sugar Land, Texas, the company is engaged in the refining of petroleum primarily in the United States. It has refining and related logistics assets that operate in the mid-continent region.
CVR Refining has a VGM Score of A. It has expected earnings growth of 255% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.4% over the last 30 days.
Geopark Ltd. (GPRK - Free Report) headquartered in Santiago, Chile, the company is an explorer, operator and consolidator of oil and gas. It operates primarily in Chile, Colombia, Brazil and Argentina.
Geopark has a VGM Score of A. It has expected earnings growth of 745.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 65.3% over the last 30 days.
Occidental Petroleum Corp. (OXY - Free Report) headquartered in Houston, Texas, the company is an international oil and gas exploration and production company with operations in the United States, Middle East and Latin America.
Occidental Petroleum has a VGM Score of B. It has expected earnings growth of 350.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 26.5% over the last 30 days.
Tallgrass Energy GP, LP (TEGP - Free Report) headquartered in Leawood, Kansas, the company is engaged in the transportation, storage and processing of natural gas. It is also involved in the transportation of crude oil and provision of water business services primarily to the oil and gas exploration and production industry.
Tallgrass Energy has a VGM Score of B. It has expected earnings growth of 50% for the current year. The Zacks Consensus Estimate for the current year has improved by 5.6% over the last 30 days.
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