Following the oil crash toward the end of 2018 that caught everyone off guard, crude ended up posting the biggest first-quarter gain in a decade. With oil popping up to $60.55 a barrel, the March quarter witnessed the fastest rate of oil price increase since 2009.
Prices rose 30% during the quarter, underpinned mainly by OPEC+ supply cuts, and U.S. sanctions against Venezuela and Iran. Despite concerns about global economic slowdown, demand for crude oil is likely to remain stable in the near term.
What’s Driving Oil Prices Higher?
The OPEC+ deal has certainly been one of the major drivers behind the uptick in oil prices. OPEC and Russia-led oil exporters’ decision to cut crude oil supplies by 1.2 million barrels per day (bpd) beginning January 2019 has aided in the stabilization of oil prices.
Under the OPEC+ deal, Russia planned to cut oil production by 228,000 bpd over a six-month period starting January 2019. While it curtailed production by 47,000 bpd in January and 97,000 bpd in February, the Russian Energy Minister believes that the country should have managed to curb the same by 228,000 bpd within March-end or early April.
In addition to the OPEC+ led supply cuts, U.S. sanctions against Venezuela and Iran havealso tightened the commodity’s fundamentals. Amid escalating tensions between Venezuela and the United States, the U.S. government announced sanctions on Venezuela's state-owned oil company, Petroleos de Venezuela SA (PDVSA),as part of which American companies have been restricted to conduct business with PDVSA.
Since shipments to the United States constituted around 75% of the cash received by Venezuela for crude shipments, this move has hit the country hard, with reduced exports on one hand and oil price boost on the other hand. According to the International Energy Agency (IEA), Venezuela's crude output is likely to decline from 1.3 million bpd in 2018 to 750,000 bpd in 2019.
Notably, the IEA predicts that crude demand will rise 7.2 million bpd through 2024. The worldwide oil demand in 2019 will be 100.5 million bpd, up 1.2% year over year. Despite the surge in electric cars and green initiatives, usage of oil in petrochemicals and aviation industry will be the demand drivers. Around 30% of the demand will result from these factors. Moreover, increasing demand of oil from China and India is propelling crude prices.
After imposing levies on each other’s products for months, the United States and China are likely to ease things down. With hopes of trade tensions between the United States and China to subside, crude oil price will get a major boost, in turn reducing the likelihood of a global economic slowdown.
Supply Issues Appear to Be Supportive
While Trump urged OPEC via Twitter to relax the supply cuts in order to boost prices, the OPEC+ members didn’t respond. The OPEC+ cohortis likely to meet in June to decide whether to continue with supply cuts or not. While Saudi Arabia is likely to continue with the supply cuts, Russia is likely to show less willingness to continue with the agreement, especially after September. Further, hefty draws in product inventories (gasoline and distillate) led to bullish sentiments in the energy market.
Last week, the rig count dropped to the lowest level in nearly a year, marking the biggest drop in a quarter in three years. Importantly, this is an indicator of lower future output in North America.
In short, with the dynamics currently in place, we see oil supply balance heading in the right direction. This not only puts a floor beneath prices for the time being but is likely to aid the continuation of commodity’s recent gains, eventually to around $65 per barrel.
With the crude rally likely to continue, it will be prudent to invest in energy stocks. As such, we have shortlisted a few stocks carrying a Zacks Rank #1 (Strong Buy) or #2 (Buy), along with a VGM Score of A or B. You can see the complete list of today’s Zacks #1 Rank stocks here.
Antero Resources Corp. (AR): Headquartered in Colorado, this upstream energy player sports a Zacks Rank #1 and has a VGM Score of A. The company has a long-term expected earnings growth rate of 20%.
Helmerich & Payne (HP): Headquartered in Oklahoma, this drilling giant carries a Zacks Rank #2 and a VGM Score of A. The company’s has an expected y/y earnings growth rate of 1,071.4% for fiscal 2019.
ConocoPhillips (COP): This Texas-based energy explorer carries a Zacks Rank #2 and a VGM Score of B. The company has a long-term expected earnings growth rate of 7.5%.
Devon Energy Corp. (DVN): Based in Oklahoma, this oil and gas explorer carries a Zacks Rank #2and has a VGM Score of B. Devon’s 2019 earnings are likely to grow 21.71% on a year-over-year basis.
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ConocoPhillips (COP): Free Stock Analysis Report
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