Posting its fourth quarterly gain in a row, oil prices ended June 2018 up more than 14% sequentially. The commodity continued its bullish path during the April-June quarter after it got off to a strong start this year with the West Texas Intermediate (WTI) crude futures climbing about 7.5% in the first three months of 2018.
The first half of the year saw oil benchmark in the United States attain its highest settlement since November 2014 despite record high domestic production. Crude was supported by a variety of catalysts, including a series of buoyant weekly EIA crude inventory numbers, worries about tightening global supplies in the midst of strong demand, and doubts over OPEC’s ability to boost production.
What’s encouraging is that the half yearly price appreciation extends an upbeat tone in crude trade into the final six months of 2018 following the futures contracts’ back-to-back yearly increases. To be precise, the commodity rose about 23% in the first six months of 2018 to finish June at $74.15 per barrel.
Reasons for Oil's Half-Yearly Surge
Sharp Inventory Drawdowns: The U.S. Energy Department's inventory releases have shown multiple weeks of strong inventory draws in the domestic crude stockpiles, a pointer to a tightening oil market. Oil inventories have generally trended lower in a year and a half. In fact, stockpiles have shrunk in 44 of the last 64 weeks and are down more than 90 million barrels in the past year. The gradual fall – stemming from a combination of lower imports and spiraling exports – has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. At 416.6 million barrels, current crude supplies are 18% below the year-ago figure and 4% under the five-year average.
Red-Hot Demand: The major factor fueling higher oil prices is the fast-growing demand for the commodity, which continues to tighten the market. The International Energy Agency (IEA) in its closely watched monthly oil-market report, said that global demand is likely to grow by 1.4 million barrels a day this year as well as in 2019.
OPEC Supply Concerns: Oil prices have also been supported by OPEC’s recent plans for a smaller-than-expected output raise. In June, OPEC agreed to stabilize the market by making modest increase in crude output. At the Vienna meeting, top producers came together and decided to raise volumes by about 1 million barrels per day from July to make up for falling production in Venezuela. The consensus figure was well below some of the numbers that had been floated ahead of the meeting, while the actual addition is expected to be even lesser – at around 700,000 barrels a day – due to several member countries’ inability to boost exports.
Dwindling Venezuela Output: Fast-falling production in Venezuela have added to the jitters. With the country tethering on the verge of an economic collapse, oil output has dwindled by more than 40% since 2016. Venezuela currently churns out around 1.4 million barrels per day, the least since the 1950s and much lower that its pledge per the OPEC-led supply cuts. Fresh U.S. sanctions on the Maduro regime will further strangle the Latin American nation’s struggling energy sector.
Potential Decline in Iranian Exports: Oil prices have also run up on United States’ refusal to issue any waivers on cutting crude imports from Iran by Nov 4 when sanctions are imposed against the Islamic Republic. Last month, President Trump withdrew from a nuclear deal with OPEC’s third-largest producer and pledged to reimpose sanctions on Tehran. The action has stoked worries about an expected cut in Iranian oil exports – at 2.7 million barrels a day – by around one million barrels and lead to a supply shortage in an already tight oil market.
How to Identify the Outperformers?
The strong half-yearly rally does not necessarily indicate that all energy scrips would be wise picks. Moreover, with a wide range of energy firms thronging the investment space, it is by no means an easy task for investors to arrive at stocks that have the potential to deliver attractive returns. While it is impossible to be sure about such outperformers, this is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy.
In particular, we have shortlisted five companies that have outperformed oil prices year to date and have a Zacks Rank of #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Marathon Oil Corporation (MRO - Free Report) is a leading oil and natural gas exploration and production company, focused primarily in the United States. The stock currently has a Zacks Rank #1. In the last 60 days, eight earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 47.5% in the same period. Marathon Oil shares have gained 25.7% in 2018.
YTD Price Performance: MRO
Whiting Petroleum Corporation (WLL - Free Report) is a top-tier upstream operator in North Dakota's Williston Basin. The stock currently has a Zacks Rank #1. In the last 60 days, eight earnings estimates moved north, while two moved south for the current year. The Zacks Consensus Estimate for earnings has risen 26.7% in the same period. Whiting Petroleum shares have gained 94.1% in 2018.
YTD Price Performance: WLL
Anadarko Petroleum Corporation (APC - Free Report) is one of the largest independent oil and natural gas exploration and production companies of the world. The stock currently has a Zacks Rank #1. In the last 60 days, 11 earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 28.7% in the same period. Anadarko Petroleum shares have gained 37% in 2018.
YTD Price Performance: APC
Hess Corporation (HES - Free Report) is a global explorer and producer of oil and natural gas. The company’s domestic operations are concentrated in the Bakken, Utica, and deepwater Gulf of Mexico. The stock currently has a Zacks Rank #2. In the last 60 days, five earnings estimates moved north, while two moved south for the current year. The Zacks Consensus Estimate for earnings has risen 31.5% in the same period. Hess shares have gained 38.9% in 2018.
YTD Price Performance: HES
Mammoth Energy Services, Inc. (TUSK - Free Report) is an oilfield services provider with a variety of equipment, maintenance, and engineering and construction offerings to the energy sector. The stock currently has a Zacks Rank #2. In the last 60 days, four earnings estimates moved north, while one moved south for the current year. The Zacks Consensus Estimate for earnings has risen 10.9% in the same period. Mammoth Energy Services shares have gained 75.4% in 2018.
YTD Price Performance: TUSK
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