Crude Oil Closes Highest in August on Supply Crunch: 4 Picks

On Aug 29, crude oil prices reached its highest level in August fueled by supply bottleneck in the United States, concerns over U.S. sanctions on Iran and strong global demand. Moreover, supply shortages from Venezuela and Libya continue to persist.

The International Energy Agency (“IEA”) has issued a warning of a tight global oil market toward the end of the year. This is likely to keep the crude price remain robust in the near term. At this stage, investment in energy stocks engaged primarily in oil explorations will be a prudent move.  

Oil Prices Hit Highest Level in August

On Aug 29, the U.S. West Texas Intermediate (“WTI”) crude futures gained 98 cents or 1.4% to settle at $69.51 a barrel on the New York Mercantile Exchange. Likewise, international benchmark Brent crude futures rose 1.6% or $1.19 to $77.14 per barrel on London’s ICE exchange.

As a result of crude oil price surge, the Energy Select Sector SPDR ETF (XLE) was up 0.6%. Year to date, Energy Select Sector SPDR ETF (XLE) gained 4.1%, positioning itself as the fourth best performing sector out of 11 broader-based sectors of the S&P 500 index.

U.S. Crude Oil Supply Bottleneck

On Aug 29, The Energy Information Administration (EIA) reported that for the week ended Aug 24, the U.S. crude supplies fell by 2.6 million barrels to 405.79 million barrels. In contrary, the American Petroleum Institute reported a modest increase of 38,000 barrels for the same week just a day ago. Notably, this was the second consecutive week of decline in U.S. crude oil supply.

 Moreover, the EIA report also revealed that Gasoline stocks declined by 1.6 million barrels and Distillate stockpiles (including diesel and heating oil) decreased 837,000 barrels.

U.S. Sanction on Iran Approaching

In May, the United States walked out of the Iran nuclear pact formed in 2015. Further, the Trump administration has threatened all countries with U.S. sanctions if they don’t stop importing oil from Iran by Nov 4.

According to The Wall Street Journal, oil export from Iran has already started declining as several oil importers are pulling out of country fearing U.S. sanctions. Notably, Iran is the third largest oil producer of OPEC. In August, Iran’s oil export is estimated to decline to 2.06 bpd (barrels per day), a stiff fall from its peak of 3.09 bpd in April. As per Thomson Reuters, Iran's crude oil and condensate exports in August are set to drop below 70 million barrels for the first time since 2017.

Supply Shortage from Venezuela and Libya

At present, combined oil supply from Iran, Libya and Venezuela are at their lowest since January.  Venezuela is plagued with economic instability and its oil production is not anticipated to reach normalcy till the end of 2018. Libya is yet to recover from civil war which drastically reduced its oil productions.

Demand for Crude Oil Remains Firm

In July, the OPEC estimated that total world oil consumption is anticipated at 98.85 million bpd and 110 million bpd in 2018 and 2019, respectively. Several industry experts pointed that global oil inventories have already returned to its five-year average. However, the demand for oil remains robust. In such a situation, OPEC’s decision to increase production by 624,000 bpd will only just compensate the shortage and not result in a production glut.  

Our Top Picks

Strong international demand for crude oil, tight global oil inventories and stabilization of oil production level will aid oil price rally in the near term. Consequently it will be lucrative to invest in good energy stocks. However, picking winning stocks can be a difficult task.

This is where our VGM Score comes in handy. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select the winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.

We have narrowed down our search to the following stocks, each of which has either a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of either A or B.

The chart below depicts price performance of our four picks in the last six months.

Ecopetrol S.A. EC is a Colombia-based petroleum company focused primarily on the eastern Llanos Basin of Colombia and northern Peru. It has expected earnings growth of 90.8 % for current year. The Zacks Consensus Estimate for the current year has improved by 13.7% over the last 30 days. The company has a Zacks Rank of #1 and a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Northern Oil and Gas Inc.  NOG is an oil exploration and production company with the Williston Basin as the core area of focus. It has expected earnings growth of 250 % for current year. The Zacks Consensus Estimate for the current year has improved by 19.5% over the last 30 days. The company has a Zacks Rank #2 and a VGM Score of B.

Denbury Resources Inc.  DNR operates as an independent oil and natural gas company in the United States. It has expected earnings growth of 235.7 % for current year. The Zacks Consensus Estimate for the current year has improved by 17.5% over the last 30 days. It has a Zacks Rank #2 and a VGM Score of B.

Southwestern Energy Co.  SWN operates as an independent oil and natural gas company in the United States. It has expected earnings growth of 97.7 % for current year. The Zacks Consensus Estimate for the current year has improved by 7.4% over the last 30 days. It has a Zacks Rank #2 and a VGM Score of A.

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Southwestern Energy Company (SWN) : Free Stock Analysis Report
 
Ecopetrol S.A. (EC) : Free Stock Analysis Report
 
Northern Oil and Gas, Inc. (NOG) : Free Stock Analysis Report
 
Denbury Resources Inc. (DNR) : Free Stock Analysis Report
 
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