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OPEC Extends Output Cut to Boost Oil Prices: Winners & Losers

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OPEC and its members have officially decided to extend production cut to shore up oil prices. The extension came at a time when U.S. production continues to rise and demand worries persist. Nonetheless, here’s a rundown on the OPEC production cuts’ big winners and losers —

Oil Prices Climb

Oil prices continue to edge up after OPEC and its allies agreed to extend supply cut by nine months. In electronic trading, West Texas Intermediate crude futures were up 18 cents at $59.27 a barrel, after hitting its highest level in over five weeks on Jul 1.

U.S. crude settled at $59.09 a barrel on the New York Mercantile Exchange, up 62 cents, or 1.1% in the last trading session. Dow Jones Market Data added that the front-month contract prices posted an eye-popping 9.3% gain in June.

Brent crude futures, by the way, were trading up 34 cents, or 0.5%, at $65.40 a barrel. The International benchmark increased 32 cents, or 0.5%, to settle at $65.06 a barrel on ICE Futures Europe on Jun 1.

OPEC Extends Production Cut

The production cut is till next March, a move particularly designed to put a check on oil prices falling on growing output. The United States, incidentally not a member of OPEC, continues to ramp up oil production at a fast clip. Needless to say, the boom in the Permian Basin has pushed the United States to the top spot as an oil producer.

Participating non-OPEC members also need to approve the agreement. And Russia, by far the most significant non-OPEC member, has given enough hints that it is willing to co-operate with the production cut.

During the Group of 20 leaders’ summit in Japan, Russian President Vladimir Putin said that both Russia and Saudi Arabia have decided to extend the oil production-reduction deal. Saudi Energy Minister Khalid al-Falih too confirmed that major alliances have “enthusiastically came together” to support the charter.

It’s worth pointing out that the alliance between Russia and OPEC does have a major hold in determining the world’s crude oil production. OPEC, individually, may control less than 50% of the world’s crude oil production but the coalition does exceed half of global oil production.

Growing U.S. Crude Production – Not the Only Concern

The demand outlook for global oil is bleak, which is also a reason for the OPEC production cut. The International Energy Agency confirmed that “a warm winter in Japan, a slowdown in the petrochemicals industry in Europe, and tepid gasoline and diesel demand in the United States” are all affecting world oil demand.

Analysts also believe that changes in modes of transportation, especially, rise of electric vehicles and government’s initiatives to reduce ill-effects on climate can easily dent demand for oil.

Energy Shares Gain

As demand for oil continues to scale, the energy sector is positioned to boost your portfolio. Most importantly, companies that are involved in hydraulic fracturing are poised to gain significantly. This is because a drop in oil price hurts their cost structure, killing the motive to pump. Thus, zeroing down on oil stocks poised to stand out as top investments for this year seems judicious.

Approach Resources, Inc. focuses on the acquisition, exploration, development, and production of unconventional oil reserves in the United States. The stock currently has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its current-year earnings has moved 32% up in the past 60 days. The company’s expected earnings growth rate for the current year is 23.1% compared with the Oil and Gas - Exploration and Production - United States industry’s projected decline of 9.4%.

Berry Petroleum Corporation (BRY - Free Report) engages in the development and production of conventional oil reserves located in the western United States. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has risen 6.1% in the past 90 days. The company’s expected earnings growth rate for the current year is 23.8% compared with the Oil and Gas - Exploration and Production - United States industry’s projected decline of 9.4%.

Panhandle Oil and Gas Inc. acquires, develops, and manages oil and natural gas properties in the United States. The stock currently has a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its current-year earnings has climbed 81% in the past 60 days. The company’s expected earnings growth rate for the current year is 138.2% compared with the Oil and Gas - Exploration and Production - United States industry’s estimated decline of 9.4%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Gold Edges Up

Gold prices are certainly expected to move north on higher oil prices. This is because as crude oil prices rise, prices of essential goods and commodities follow suit. And value of gold rises when inflation picks up. After all, it acts as a hedge against inflation. In fact, theoretically, more than 60% of the time gold and crude oil have a direct relationship. Given this bullishness, one should consider gold mining companies.

Royal Gold, Inc. (RGLD - Free Report) acquires and manages precious metal streams, royalties, and related interests. The stock currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has moved 0.7% up in the past 60 days. The company, which is part of the Mining - Gold industry, is expected to record earnings growth of 23.4% in the current quarter.

Kinross Gold Corporation (KGC - Free Report) engages in the acquisition, exploration, and development of gold properties in the United States. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has climbed 8.3% in the past 60 days. The company’s expected earnings growth rate for the current year is 30% compared with the Mining - Gold industry’s projected rally of 15.8%.

Aviation, Refiners to Take a Hit

Aviation stocks traditionally have an inverse relationship with oil price. So, it isn’t surprising that shares of aviation firms will decline after a sharp rise in crude oil prices. After all, fuel costs are major part of the operating costs of aviation firms; thus rise in oil prices will hit profit margins.

Refineries also stand to lose from higher crude oil prices as crude is their raw material. So, refineries’ net cash flow declines when crude oil prices pick up.

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