Oil prices are heading southward on global supply glut. OPEC countries are planning to raise production levels shortly that could disrupt the supply-demand balance. In fact, concerns about increased output amplified due to Chinese tariffs on energy imports from the United States.
Fall in oil prices are a dampener for energy stocks. But why are energy sector insiders buying again? That is because there are several underlying factors that are expected to push oil prices upward in the near term.
Before we look at the factors and stocks that insiders are buying, let’s look at what is dragging oil prices down for the time being.
OPEC and its Allies Agree to Boost Output
OPEC and its allies including Russia had decided to hold back output by nearly 1.8 million barrels a day beginning in 2017. That agreement is, however, set to expire by the end of this year. In fact, major oil producers will meet on Jun 22 in Vienna to decide the fate of further oil production. Saudi Arabia, the de facto leader of the OPEC is considering a production boost of 500,000 to 1 million barrels a day. The Saudis have already raised output level last month by 100,000 barrels a day. Russia too is contemplating an increase of about 1.5 million barrels a day, as per commodity analysts led by Eugen Weinberg at Commerzbank.
U.S. crude production, in the meantime, is forecast to touch an annual record of 10.79 million barrels a day this year, according to the Energy Information Administration (EIA). Data from oil-field services firm Baker Hughes additionally revealed that the number of active U.S. rigs drilling for oil, better known as the gauge of domestic production activity, rose by 1 to 863 last week, leading to the fourth-straight weekly jump.
This oil supply glut has weakened oil prices. The West Texas Intermediate crude, the U.S. benchmark traded on the New York Mercantile Exchange, declined by $1.83, or 2.8%, to settle at $65.06 a barrel on Jun 15, while the Brent crude, the global benchmark lost $2.50, or 3.4%, to reach $73.44 a barrel.
Trade War Fears Intensify Pressure
Building on Jun 15’s slide, oil prices continue their downward journey, thanks to the trade war between the United States and China. The White House will impose a 25% tariff on $50 billion Chinese imports, which has increased the chances of a confrontation with China over trade. China has accused the United States for ratcheting a trade war. The Chinese government said that it will respond accordingly to U.S. tariffs.
Energy-related products have been targeted as China prepares retaliatory tariffs against the United States. This means that China, the world's biggest importer of oil could shun U.S. items at a time when exports of crude, coal and liquefied natural gas to Asia have been steadily increasing (read more: Trade War Fears Grip Wall Street: Buy 5 Ultra-Safe Stocks).
Insiders Are Buying
The drop in oil prices is, no doubt, taking a toll on energy players. But insiders in energy companies have been purchasing a lot of shares. They believe that several underlying factors will drive oil prices in the near term.
Supply-demand disparity does remain. But since a recession does not seem to be in the horizon, global demand growth will eventually scale north. Supply growth, on the other hand, could face constraints due to chronic underinvestment in long-term projects by major oil companies in the last three years.
By the way, geopolitical risks remain elevated in places like Saudi Arabia, Israel, Iran, Libya and Nigeria to name a few. This in turn can anytime propel oil prices. And if Saudi Arabia’s intention to increase production level is bothersome, then one should remember that there is already a cap on how much it can produce since it is near its limit. Needless to say, global production will automatically tank as wells run dry.
All these explain why insiders have bought over $12 million worth of stock at a dozen energy companies. Insider buying may not guarantee an uptick in oil prices, but, it does show that the energy stocks are oversold, ready to bounce back anytime soon.
Let us, thus, have a look at three energy companies that are poised to do well from here and the ones that insiders are currently buying.
Continental Resources, Inc. (CLR - Free Report) explores for, develops, and produces crude oil and natural gas properties in the north, south, and east regions of the United States.
Insider purchase: $8.8 million by CEO Harold Hamm at $65.30 on May 29.
In the last 60 days, seventeen earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings increased 28% in the same period. The stock’s estimated growth rate for the current year is 517.7% versus the Oil and Gas - Exploration and Production - United States industry’s projected rally of 23.4%.
Continental Resources, Inc. Price and Consensus