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Global Crude Oil Price Hits 4-Year High: 4 Top Picks

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On Sep 25, crude oil price reached its highest level in four-years as OPEC, the largest oil producing cartel, and its Russia-led allies rejected President Trump’s demand to increase oil production in order to reduce price. Notably, oil prices were fueled further by concerns over U.S. sanctions on Iran, supply bottlenecks in the United States and strong global demand.

The International Energy Agency (“IEA”) has issued a warning of a tight global oil market toward the end of the year. This is why the crude price is likely to remain robust in the near term. At this stage, investment in energy stocks engaged primarily in oil explorations will be a prudent move.
 

Crude Oil Price Hits 4-year High

On Sep 25, international benchmark Brent crude futures rose 0.6% or $0.49 to $81.69 per barrel on London’s ICE exchange, its highest since Nov 12, 2014. The U.S. West Texas Intermediate (“WTI”) crude futures gained 22 cents or 0.3% to $72.30 a barrel on the New York Mercantile Exchange.

As a result of crude oil price surge, the Energy Select Sector SPDR ETF (“XLE”) was up 1.5% on Sep 24. Year to date, XLE gained 5.5%, positioning itself as the fourth best performing sector out of 11 broad-based sectors of the S&P 500 index.

U.S. Sanction on Iran Approaching

In May, the United States walked out of the Iran nuclear pact formed in 2015. Further, the Trump administration has threatened all countries with U.S. sanctions if they don’t stop importing oil from Iran by Nov 4.

According to J.P. Morgan and Bank of America Merrill Lynch, U.S. sanctions on Iran will result in a loss of around 1.5 million barrel per day (bpd) of crude oil. Commodity traders Trafigura and Mercuria have estimated that around 2 million bpd of oil will be evacuated from international market after Nov 4.

Supply Shortage From Venezuela, Libya and U.S.

At present, combined oil supply from Iran, Libya and Venezuela are at their lowest since January.  Venezuela is plagued with economic instability and its oil production is not anticipated to reach normalcy till the end of 2018. Libya is yet to recover from civil war which drastically reduced its oil productions.

For the last five consecutive weeks, the Energy Information Administration (“EIA”) has been reporting decline in U.S. crude inventories. It is currently at its lowest level since early 2015. Subdued US drilling activity may result in a drop in output.

Crude Oil Price Likely to Remain Firm

The demand for oil remains robust. In July, OPEC estimated that total world oil consumption is anticipated at 98.85 million bpd and 110 million bpd in 2018 and 2019, respectively. Robust demand and supply crunch is likely to raise oil prices.

Notably, J.P. Morgan has lifted its target for Brent crude price to $90 per barrel for the next few months. Trafigura and Mercuria forecasted that Brent could rise to $90 by Christmas and exceed $100 by early 2019.

Our Top Picks

Strong international demand for crude oil, tight global oil inventories and stabilization of oil production level will aid oil price rally in the near term. Consequently it will be lucrative 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 either a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of either A or B.

The chart below shows price performance of our four picks in the last three months.

Petroleo Brasileiro S.A. - Petrobras (PBR - Free Report) is an integrated company operating in exploration, production, refining, retailing and transportation of petroleum and its byproducts. It has expected earnings growth of 134.3% for current year. The Zacks Consensus Estimate for the current year has improved by 7.9% over the last 60 days. The company has a Zacks Rank of #1 and a VGM Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.

W&T Offshore Inc. (WTI - Free Report) is an independent oil and natural gas explorer focused primarily in the Gulf of Mexico area including the deep water. It has expected earnings growth of 60.7% for current year. The Zacks Consensus Estimate for the current year has improved by 4.7% over the last 60 days. The company has a Zacks Rank of #1 and a VGM Score of B.

Northern Oil and Gas Inc.  (NOG - Free Report) is an oil exploration and production company with the Williston Basin as the core area of focus. It has expected earnings growth of 292.9% for current year. The Zacks Consensus Estimate for the current year has improved by 34.1% over the last 60 days. The company has a Zacks Rank #2 and a VGM Score of B.

Denbury Resources Inc.  (DNR - Free Report) operates as an independent oil and natural gas company in the United States. It has expected earnings growth of 242.9% for current year. The Zacks Consensus Estimate for the current year has improved by 20% over the last 60 days. It has a Zacks Rank #2 and a VGM Score of A.

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