The past month has been a tumultuous one for oil. Brent crude dropped like a stone to its lowest level in almost two decades toward $20 a barrel. Lest we forget, it had traded above $70 a barrel earlier this year. The coronavirus pandemic has hammered demand for oil and led to oversupply issues. The Saudi-Russian feud did no good either.
However, major oil producers across the globe recently pulled off an unparalleled deal to trim global production by nearly 10 million barrels, or a tenth of global supply, putting an end to the price war between Saudi Arabia and Russia.
A group of 20 nations along with OPEC and its allies held several conferences to finally reach an agreement to tackle the damaging impact of the pandemic on oil. The spread of the deadly virus has hit air travel and hampered demand for jet fuel. This certainly raised concerns about the future of the U.S. shale industry as well as the stability of states that are solely dependent on oil.
Nonetheless, OPEC+ unanimously decided to cut production by 9.7 million barrels a day, slightly below the initial proposal of 10 million. In fact, like central banks taper off bond buying, OPEC will trim the size of the cuts over time. After June till the end of the year, OPEC will be trimming production to 7.6 million barrels a day and then to 5.6 million next year until April of 2022.
The United States, Brazil and Canada in the meantime are projecting a combined 3.7 million-barrels-a-day production cut, while other G20 members will bring production down by 1.3 million barrels a day. What’s more, Mexico has agreed to cut production by 100,000 barrels a day. After all, President Trump has successfully resolved the Saudi-Mexico logjam that had been threatening the broader pact.
Such record output agreement certainly bodes well for oil prices, with West Texas Intermediate crude and Brent crude widely expected to scale north and recover some of their recent losses. In electronic trading, the West Texas Intermediate crude futures were up $1.39, or 6.1%, to $24.15 a barrel by 0058 GMT, after hitting a high of $24.74. Similarly, Brent crude futures rose $1.23, or 3.9%, to $32.71 a barrel after opening at a session-high of $33.99.
Energy Shares Gain
As oil prices spurt, the energy sector is positioned to boost your portfolio. From bigwig oil explorers and producers to rig operators and pipeline owners, all are poised to gain significantly. This is because a drop in oil price hurts their cost structure. Thus, zeroing down on oil stocks that are poised to stand out as top investments seems judicious.
Notable among them is Southwestern Energy Company SWN
. The company, known for exploration, development, and production of oil, currently has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its next-year earnings has risen 8.3% over the past 60 days. The company’s expected earnings growth rate for the next year is 73.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The other two choices can be BP Midstream Partners LP BPMP
and Holly Energy Partners, L.P. HEP
. While BP Midstream owns onshore crude oil pipeline systems, Holly Energy owns and operates petroleum product and crude pipelines.
BP Midstream’ expected earnings growth rate for the next five years is 10%, while Holly Energy’s earnings are projected to grow 1.8% next year. In fact, Holly Energy’s shares have already gained 8.2% over the past five-year period. Both the companies possess a Zacks Rank #2.
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 such as Royal Gold, Inc
and Kinross Gold Corporation KGC
Royal Gold currently has a Zacks Rank #2. The Zacks Consensus Estimate for its next-year earnings has moved 28.7% up in the past 60 days. The company is expected to record earnings growth of 37.8% and 68.3% in the current quarter and year, respectively.
Kinross Gold currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved 6.8% north in the past 60 days. The company is expected to record earnings growth of 50% and 38.2% for the current quarter and year, respectively.
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 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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