Can you think of an ‘Oil Shortage Market’ now? It is unimaginable as the commodity has long been hit by plentiful supply that has been exerting downward pressure on oil prices since mid-2014.
After a long race to secure maximum market share, oil majors are finally willing to sacrifice production for the sake of price. Now, these companies are desperately waiting for oil price to go up so that they can sell crude at high profit margins and generate handsome cash flows once again. In fact, upstream players have already reduced spending on exploration and production projects.
Then again, producing lower levels of oil could only be a short-term solution and eventually lead to an oil deficit market. Like an oversupplied oil market, crude shortage also represents market imbalance. In fact, Paris-based International Energy Agency (IEA) – a major energy consultative body of industrialized countries – warns of oil shortage by the end of this decade.
Oil prices have plunged much below the level it was trading during mid-2014 owing to oversupply. Following this, energy players involved in exploration and production activities have been facing difficulties as they are not being able to sell the commodity at healthy prices to refiners and other downstream players.
As a natural consequence, the world is looking for opportunities to lower output level — one of the prime measures that analysts think will restore crude.
This is exactly why all eyes are on the OPEC meeting to be held at Vienna, Austria on Nov 30, 2016, wherein the cartel is expected to reach an agreement on oil production cut. In fact, Bijan Zanganeh – oil minister of Iran– expressed optimism that if an agreement is reached by OPEC members on Nov 30, oil could cross the $50 per barrel mark. He further added that if non-OPEC members support production curb, crude could touch the $55 per barrel level again.
Consistent efforts in curbing crude production have encouraged oil producing majors to invest at lowest levels since 1950 in new projects. Overall, these measures are definitely useful in restoring oil price in the short run. But the long-term may see oil becoming exorbitant if commodity surplus turns to shortage in the coming years. This again, will not favor the market.
The IEA warns that if investments in new oil projects remain low at 2017, it will be three years in a row that less capital is being invested in upstream developments. That might create problems in feeding oil demand by early 2020. Fundamentally, a new oil field requires at least three to six years for generating oil as per IEA. Hence, if the current level of investment is not increased, there might be problems in generating new oil if there is any additional immediate demand in a crude shortage era.
Energy Players: Gainers & Losers
We know that oil price determines the fate of almost all energy players. If the crude market transforms from surplus to shortage, oil prices will flare up.
Definitely good times are coming up oil exploration and production players like Matador Resources Company MTDR, Apache Corp. APA, EOG Resources, Inc. EOG and SM Energy Company SM. This is because all these debt-laden upstream companies will be able to sell the commodity at much higher prices and be financially sound again. Here, Matador Resources, Apache and SM Energy carry a Zacks Rank #2 (Buy) while EOG Resources carries a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
However, bad times may be in store for refiners like Western Refining, Inc. WNR, Valero Energy Corp. VLO and Marathon Petroleum Corp. MPC. These players will have to buy raw crude at higher prices which would raise their input cost. All the three refiners carry a Zacks Rank #3 (Hold).
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