Favorable Demand-Supply Mix to Boost Crude Oil Price: 5 Picks

Crude oil prices are expected to remain stable in rest of 2018 as well as in 2019 primarily backed by strong demand and supply shortage. A likely dip in U.S. crude oil production and supply bottlenecks in Iran, Venezuela and Algeria owing to geopolitical issues are major supply side concerns.

Meanwhile, the global demand for petroleum remains firm and is anticipated to grow next year. This will enable the crude price to remain robust in both 2018 and 2019. At this stage, investment in energy stocks engaged primarily in oil explorations will be a prudent move.  

EIA Cuts U.S. Crude Oil Production Level for 2019

On Sep 11, the Energy Information Administration (EIA) of the United States stated that the U.S. crude oil production is expected to grow by 840,000 barrels per day (bpd) to 11.5 million bpd in 2019 compared with the previous estimate of a rise of 1.02 million bpd to 11.7 million bpd.

However, EIA kept its 2018 projection of growth unchanged in the range of 1.31 million bpd to 10.66 million bpd. The agency has pointed out that limited pipeline takeaway capacity will remain a major hindrance to the Permian basin oil explorations.

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 exports from Iran have 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.

Iran's oil production fell by 150,000 bpd from July to August to around 3.5 million bpd. 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

At present, combined oil supply from Iran, Libya and Venezuela are at their lowest since January.  Venezuela is plagued by economic instability and its oil production is not anticipated to reach normalcy till the end of 2018.

Demand for Crude Oil Remains Firm

Recently, OPEC estimated that total world oil consumption is anticipated at 98.85 million bpd in 2018 and expected to increase to more than 100 million bpd in 2019, for the first time in history. In such a scenario, OPEC’s decision to increase production by 624,000 bpd will only just compensate the shortage and not result in a production glut.  Additionally, several European oil majors have already started bundling their operations in Iran. This will further intensify oil shortage.

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 five 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 five picks in the last three months.

Petróleo Brasileiro S.A. - Petrobras PBR is a Brazil-based energy company engaged in exploration and production of oil and natural gas. The company has expected earnings growth of 134.3 % for current year. The Zacks Consensus Estimate for the current year has improved by 12.3% over the last 60 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.

Ecopetrol S.A. EC is a Colombia-based petroleum company focused primarily on exploration and production of oil and natural gas. It has expected earnings growth of 90.8 % for current year. The Zacks Consensus Estimate for the current year has improved by 23.8% over the last 60 days. The company has a Zacks Rank of #1 and a VGM Score of A.

Northern Oil and Gas Inc.  NOG is a U.S.-based oil exploration and production company with the Williston Basin as its core area of focus. The company has expected earnings growth of 271.4 % for current year. The Zacks Consensus Estimate for the current year has improved by 40.5% over the last 60 days. It 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. The company has expected earnings growth of 235.7 % for current year. The Zacks Consensus Estimate for the current year has improved by 23.7% over the last 60 days. It has a Zacks Rank #2 and a VGM Score of B.

TransGlobe Energy Corp.  TGA is a Canada-based explorer, developer and producer of crude oil and natural gas. It has expected earnings growth of 282.1 % for current year. The Zacks Consensus Estimate for the current year has improved by 2,450% over the last 60 days. It has a Zacks Rank #2 and a VGM Score of A.

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Petroleo Brasileiro S.A.- Petrobras (PBR) : Free Stock Analysis Report
 
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