WTI (West Texas Intermediate),the American benchmark in oil pricing, is currently inching closer to $65 per barrel, reflecting almost 40% higher than the starting level of 2019. Brent, started this year with near $50 per barrel mark, and is currently hovering above $70. Although several pundits cited numerous reasons last year, which could drag the prices down in the current year, the reality still seems otherwise.
A bearish outlook for Asian economies, expectations of lower demand, increased inventories, waivers on Iranian sanctions and many other factors pulled WTI crude down to around $45 per barrel level during 2018 end. This gloomy outlook was anticipated to act as a constraint for the prices to rise, which even forced several energy companies like Centennial Resource Development, Inc. CDEV and Diamondback Energy, Inc. FANG to slash their capital for exploration and production operations in 2019. Yet here we witness much better-than-projected oil prices with the onset of the second quarter.
Let’s take a quick glance at the factors, which are bumping up oil prices higher.
OPEC+ Production Cuts
Last year, OPEC and non-members (together called OPEC+) decided to reduce output to check the free fall of crude prices. The cartel decided to curb the yield by a total of 1.2 million barrels per day (BPD) from the peak levels reached last October, essentially for the first half of 2019. Despite current prices ranging within a comfortable zone, the oil cartel is reluctant to ramp up production right now. In fact, OPEC is presently focused more on balancing crude prices to a profitable level than pushing supplies, like it did in the past that drove the reserves. Major non-OPEC entity, Russia, was contemplating a removal of the production cuts but is yet to take a firm call.
The major emergency in Venezuela following President Nicolas Maduro's future as the country's leader being put to question, has affected the nationwide crude production. Output from this major OPEC member fell from the 2015-level of 2.4 million BPD to 961,000 BPD in March 2019. This, in turn, has significantly hurt the global oil supply, leading to a positive pricing pressure.
Lower-Than-Expected Fall in Demand Growth
Demand for hydrocarbons, especially crude oil, was feared to be heavily dampened in 2019, primarily due to soft growth in oil demand in the Asian markets. However, the degree of weakness in growth was not in proportion to the earlier forecast. In reality, it has challenged the expectations and as we move in the thick of the second quarter, demand is likely to surge. An Asian powerhouse — India — is reportedly predicted to beat its counterpart China’s growth volumes. In 2019, the demand growth level in India is estimated to reiterate last year’s tally, if not more. The rapid industrialization across the Asia-Pacific belt is envisioned to generate solid demand for oil in the upcoming years.
Last week, Eastern-based forces launched an attack to capture the capital of Libya, Tripoli. The armed conflict raised a significant concern for oil output from the OPEC country, which was once the third-largest producer in Africa with 1.6 million BPD output. The ongoing issues currently compressed production to 1.1 million BPD. Similarly, bombings, abductions and targeted onslaughts by Boko Haram created an unsafe environment in Nigeria. The clashes between the government regime and Boko Haram heightened political tensions in the country, which can potentially jeopardize crude output from the soil of this chief producing nation. Political turmoil in Libya and Nigeria played an instrumental role in inflating the crude prices.
Waivers to Expire
Iran-sanction waivers are set to run out in a few weeks. Countries like China, India, South Korea, Japan and several other mega-customers of Iranian oil (who were earlier exempted from the U.S. sanctions) are currently unsure of the extension of waivers. As a result, they are looking for some other producers. In fact, a section of the industry observers feels that the United States might not grant any waiver extension to some nations, which could induce a huge demand gap in the crude market. This is expected to dry up Iran’s exports, causing a huge void in supply. This move naturally spikes the oil prices.
All the above-mentioned reasons have put the oil prices in the current favourable spot. The present environment will certainly benefit the upstream operators, primarily those flaunting an oil-heavy portfolio.
Our Top 5 Picks
We have chosen five best bets for investors that are expected to leverage the price rise as given below:
Headquartered in Houston, TX, W&T Offshore, Inc.’s WTI earnings beat estimates in the trailing four quarters, the average positive surprise being 47.1%. Significant proved reserve bases in both the shelf and deepwater resources across the Gulf of Mexico will contribute to the upstream energy player’s future cash flows. The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Houston, TX-based Apache Corporation’s APA earnings topped the consensus mark in the last four quarters, the average beat being 34.1%. Driven by an improved Permian well productivity, the company assumes its 2019 output to be in the band of 425-440 Mboe/d, reflecting an increase from 421 Mboe/d in 2018. The stock currently has a Zacks Rank #2 (Buy).
Based in Oklahoma City, OK, Devon Energy Corporation DVN is expected to witness more than 24% year-over-year rise in its earnings per share for the ongoing year. The company with a Zacks Rank of 2, has operations in the United States and Canada.
Austin, TX-domiciled Parsley Energy, Inc. PE delivered average earnings surprise of 6.6% in the preceding four quarters. Its strategic acreage position in the low-cost Permian Basin is a major positive. This year, the company expects its total output to expand above 18% on a yearly basis. It is a Zacks #2 Ranked player.
Midland, TX-headquartered Viper Energy Partners LP VNOM generates a strong and steady royalty income from the mineral interests in the prolific basins across the United States. The firm is projecting annual organic production growth of 24% through 2019. Its top line is expected to increase more than 17% in 2019. Viper Energy is a #2 Ranked player.
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CENTENNIAL RES (CDEV): Free Stock Analysis Report
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