The market is perhaps habituated to persistently weak oil prices following an oversupplied commodity market. But instead of taking steps to lower output, all major producers went on swelling up their inventory, pushing crude to multiyear lows.
In a move to restore oil, the Organization of the Petroleum Exporting Countries (OPEC) decided in September to limit production to the range of 32.5–33 million barrels per day, lower than the current daily mark of 33.64 million barrels. The projected output cut was proposed to be divided among OPEC members. In fact, the cartel also wants non-OPEC players like Russia to join in the mission to trim production.
However, many analysts agree that the cartel might face difficulties in uniting the members to walk the same path. Already, Saudi Arabia refused to attend a pre OPEC meeting on Monday with Russia and other non-OPEC producers to coordinate output cuts. The reason is pretty clear: it is not feasible for producers to show interest in output cut by letting others to win the race for more market share. Amrita Sen – chief oil analyst at Energy Aspects – explains, “At the end of the day, everyone is looking after their own interests and no one wants to lose market share.”
Since both sides of the argument are based on sound logic, speculation will remain rife till the outcome of the OPEC meeting is clear. It’s hard to predict what the OPEC members want, but we’ll tell you which stocks to pick assuming that they decide on an output cut.
Will OPEC Go for Production Cut?
The outcome of the OPEC meeting will arguably be the most important move in the energy sector this year as oil prices could take a U-turn. Crude has been trading at less than half the price it was at during mid-2014 following plentiful supply of the commodity. Naturally, the energy market desperately wants OPEC to come up with an agreement on Wednesday.
Now there are two choices for OPEC – either it goes for a production cut or it doesn’t. Let’s analyze each of the moves and how that might impact OPEC?
Production Cut: If the cartel agrees to curb production there will definitely be sufficient pressure to push up oil prices. 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.
This improvement on the crude front will open the gate for other oil producers particularly U.S shale players as they can take the advantage of higher prices to ramp up production. Hence, U.S producers will gain market share at the expense of OPEC’s production cut.
No Production Cut: It is a common knowledge that if there is no cut in OPEC’s output, oil price will fall again. Rock-bottom crude is also bad for OPEC as it will not be able to sell the commodity at healthy prices. Some analysts including Morgan Stanley MS fear that crude could hit $35 per barrel if there is no cut.
Russia, Iran & Iraq Against Cut
OPEC wanted Russia to curb output by 300,000 barrels per day – according to people familiar with the matter. Russia initially expressed its willingness in holding output levels steady instead of curbing them. Later on, media resources confirmed that Alexander Novak — Russian Energy Minister — will not attend the OPEC meeting on Wednesday but showed interest in cooperating if the cartel strikes an output cut accord.
On the other hand, Iran — the country that has the fourth-largest proven oil reserve in the world, as per its government — recently revealed that it is continuing negotiations to be exempted from curbing production. This is because it is only this year that the country came out of its sanctions following the historic nukes deal it signed with the superpowers – U.S., Russia, Britain, Germany, France, China, and the EU – on Jul 14, 2015 in Vienna.
Iraq, the leading producer among the cartel members, also added that since it is generating revenue out of oil to fund the war against the Islamic State, it will not be feasible to lower production.
Saudi Arabia Signals No Cut
Saudi Arabia — the largest exporter of petroleum — believes that even without curbing output the market will rebalance itself to find the equilibrium price. In fact, reportedly, Khalid al-Falih — the energy minister of Saudi — has raised questions on the need to cut a deal as the market will eventually take care of itself.
Moreover, since rival Iran is unwilling to curb output, Saudi Arabia is not in a mood to lose market share. In other words, Saudi Arabia does not want its rival Iran to earn more revenue from oil at the expense of its production cut.
What the Stories Mean for Oil Stocks
As of now, figuring out what OPEC really wants can be quite mindboggling. Many analysts are projecting that OPEC will cut the deal while some are expressing doubts over the cartel’s production cut.
But investors who have bet their hard-earned money on energy stocks will obviously want the deal to materialize. This is because if there is a cut in output, enough pressure will get created to push up oil price. Following this, the players involved in exploration and production (E&P) activities will be able to sell crude at higher prices and can generate more cash flows for shareholders in the coming days.
We have employed our proprietary screening methodology to pick five oil stocks that are worth buying should the OPEC cut the much-awaited deal.
Ultra Petroleum Corp. UPLMQ, headquartered in Houston, TX, is an upstream energy player. The company, which sports a Zacks Rank #1 (Strong Buy), has an expected earnings growth rate of 425.8% for the current year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Based in Denver, CO, Resolute Energy Corporation REN is involved in E&P activities in prospective resources in the U.S. Presently, the company carries a Zacks Rank #2 (Buy). Investors should know that for the current year, the company’s earnings are expected to grow more than 159%.
Plano, TX-based Denbury Resources Inc. DNR is a growing E&P company engaged in the acquisition, development, operation and exploration of oil and natural gas properties in the Gulf Coast and Rocky Mountain regions of the U.S.
Denbury posted an average positive earnings surprise of 283.33% over the last three months. Currently, it carries a Zacks Rank #2, implying that it will outperform the broader U.S. equity market over the next one to three months.
SM Energy Company SM, based in Denver, CO, is an independent oil and gas company engaged in the exploration, exploitation, development, acquisition and production of natural gas and crude oil in North America.
The company carries a Zacks Rank #2 and managed to beat the Zacks Consensus Estimate in three of the last four quarters, with an average positive surprise of 6.88%.
W&T Offshore Inc. WTI headquartered in Houston, TX, is an upstream energy player that operates in the Gulf of Mexico. The company carries a Zacks Rank #2 and managed to beat the Zacks Consensus Estimate in each of the last four quarters, with an average positive earnings surprise of 31.49%.
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