The WTI Crude benchmark is currently approaching $64 per barrel, which has been a rare sight since September-end. As such, the beginning of 2020 is turning out to be comforting for upstream energy players with significant oil production. If this dream start continues well into the quarter, U.S. shale producers — who enjoy a relatively low production cost — will notice an increase in their earnings.
There are several factors responsible for the current upward movement of oil prices. Let’s delve deeper to understand their degree of impact on oil prices.
Factors Supporting the Oil Rally
Tensions Rising in the Middle East
An U.S. airstrike killed Maj. Gen. Qassem Soleimani, the head of the foreign wing of Iran’s Islamic Revolutionary Guard Corps, under the order of President Donald Trump. The “decisive defensive action to protect U.S. personnel abroad” is currently raising concerns that Middle East tensions may escalate and potentially disrupt oil supplies. This can further increase oil prices, at least in the short term.
OPEC+ Production Cuts
The outcome of the last month’s OPEC meeting in Vienna was favorable for the oil and gas industry. OPEC members and their Non-OPEC alliance — together called OPEC+ group — agreed to deepen production cuts in first-quarter 2020 to prevent market oversupply, which is favoring price movement. The latest production cut of 500,000 barrels per day (BPD) from the OPEC+ group will lead to total output cut of 1.7 million BPD, which represents 1.7% of global demand. Moreover, the de facto leader of OPEC, Saudi Arabia has decided to voluntarily deepen cuts by an additional 400,000 BPD. The deepening cuts have lifted oil prices, as expected. The WTI Crude price, which averaged $57.03 per barrel in November, currently stands at $63.62.
Progress in Sino-U.S. Trade Dispute
In the past several quarters, the United States and China levied tariffs on each other’s goods, which resulted in a slowdown in global economy. However, with the two big economies agreeing to the terms of a historic phase-one trade deal, investors are hopeful for better days ahead. President Trump recently said that Jan 15 will likely be the day he and his Chinese counterpart will sign the trade deal.
Although the phase-one trade deal does not address several important issues like energy and various other topics, it can be counted as a significant step. While investors are waiting eagerly for the deal to be signed, the market is optimistic about the second phase that might include data localization, digital trade, cyber intrusions and cross-border data flow. Positivity around the Sino-U.S. trade deal, which can lead to a rise in demand growth, is expected to be a boon for oil prices.
Oil Producers to Benefit
While all crude-focused stocks stand to gain from the oil rally, companies in the exploration and production sector are the best placed, as they will be able to extract more value for their products. Moreover, oil producers — which have significant U.S. shale exposure and are planning to boost production — will gain heavily from the price improvement.
Given such positives, we have selected four solid upstream energy companies to add to your portfolio. These stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum, and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners. You can see the complete list of today’s Zacks #1 Rank stocks here.
Headquartered in Houston, TX, Callon Petroleum Company CPE is solely focused on exploration, and production of oil and gas resources in the Permian Basin. The stock currently has a Zacks Rank #2 and a VGM Score of B. In the past 60 days, 10 earnings estimates have moved north, while just one moved south for 2020. The Zacks Consensus Estimate for earnings for the current year has been revised 45.7% upward in the same period.
California Resources Corporation CRC is a major hydrocarbon producer in the State of California. The stock currently has a Zacks Rank #2 and a VGM Score of A. The company beat earnings estimates thrice in the last four reported quarters, with the average positive surprise being more than 700%.
Tulsa, OK-based WPX Energy, Inc. specializes in producing fossil fuels from non-conventional resources like tight-sands and shale formations. The stock currently has a Zacks Rank #2 and a VGM Score of A. In the past 60 days, nine earnings estimates have moved north, while there has been no southbound revision for 2020. The Zacks Consensus Estimate for 2020 earnings has increased 112.8% in the same period.
Midland, TX-based Ring Energy, Inc. REI is a Permian Basin pure play company. The stock currently has a Zacks Rank #2 and a VGM Score of A. In the past 60 days, four earnings estimates have moved north, while one moved south for 2020. The Zacks Consensus Estimate for earnings for the year has been upwardly revised by 8% in the same period.
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