We are almost at the last leg of 2016, a year that was marked by unprecedented energy market volatility.
The year started on a disappointing note with crude prices falling to a 12-year low of $26.21 a barrel in Feb as investors worried about the oversupplied market. The commodity’s collapse threatened the industry’s creditworthiness by hurting cash flows, drying up liquidity and pummeling producer’s profit margins.
However, indications that supply was easing helped oil prices rebound to $50/barrel mark in early Jun. The surge was driven by outages in Nigeria, Libya, Venezuela and Canada – countries that hold some of the world’s major sources of crude. The upward pressure in oil prices also reflected the U.S. Energy Department's inventory releases that showed crude stockpile builds turning into draws. Things were further helped by a continued decline in U.S. crude production.
With factors like Canadian wildfires, Nigerian outages/disruptions, production issues in Venezuela and a strike by Kuwaiti oil workers vanishing from the market, oil slipped back under $40 in the first week of Aug. A glut of refined products also kept the commodity under pressure.
The volatility in oil prices continued with the benchmark touching the $50 threshold again early Oct, buoyed by government figures that continued to show large drawdowns, while investors betted on commitments by Organization of Petroleum Exporting Countries (or OPEC) and non-OPEC players to slash production targets.
When divisions in the cartel became apparent and the future of the ambitious OPEC announcement looked more and more uncertain, the commodity fell back under $45 only to receive a booster shot.
OPEC’s First Output Cut in 8 Years: In a bold but not unexpected move, the OPEC cartel agreed on November 30 to reduce production starting next month. Seen as a desperate bid to put a floor on falling oil prices, the Saudi Arabia-led group promised to take 1.2 million barrels a day out of the market.
OPEC's decision to cut oil production was not totally surprising though the magnitude of reduction were deeper than many analysts had expected. The move aims to trim output to 32.5 million barrels per day — at the low end of a preliminary agreement struck in September.
The landmark OPEC deal had a massive impact on the energy markets, sending crude prices back above $50 a barrel.
Non-OPEC Members Join Deal: After a few days, Russia – biggest supplier outside the bloc – and 10 other non-member countries also joined forces with the group and pledged to pump less. As per the first pact between the rivals in 15 years, the non-OPEC producers agreed to pitch in with an additional 558,000 barrels a day of cuts next year.
Over the last few years, a quiet revolution has been reshaping the energy business in the U.S. The success of ‘shale gas’ – natural gas trapped within dense sedimentary rock formations or shale formations – has transformed domestic energy supply, with a potentially inexpensive and abundant new source of fuel for the world’s largest energy consumer. As a result, once faced with a looming deficit, natural gas is now available in abundance.
Prices Fell to 17-Year Lows Earlier in 2016: With production from the major shale plays remaining strong and the commodity’s demand failing to keep pace with this supply surge, natural gas prices hit 17-year lows of around $1.6 per million British thermal units (MMBtu) in the first quarter. The glut was further exacerbated by lackluster industrial requirement over the past few years.
And Then Recovered Strongly: Since then, successive below-average builds on the back of warmer temperature across the country followed by the recent start of the withdrawal season, has been cutting into the year-over-year storage surplus. Statistically speaking, the current storage level – at around 3.8 trillion cubic feet (Tcf) is up only slightly from last year and is just 5% above the five-year average. As a result, natural gas prices have rebounded strongly and doubled from the extreme lows it hit in Mar. The dramatic recovery has helped the commodity cross the key psychological level of $3.5 per MMBtu.
Energy vs. Stock Markets:
2016 has been a great year for the stock market. A quick glance at the major indices paints this picture; the NASDAQ composite is up 9%, while the DJIA and the S&P 500 logged gains of about 14% and 11% respectively.
On the other hand, the Energy Select Sector SPDR – an assortment of the largest U.S. energy companies – has shot up 13% during the past three months, with majority of its 36 equity components trading higher. Thanks to the commodity recovery, the ETF has now risen 27% year to date, dwarfing almost every other index.
There have been some remarkable energy performers so far this year. Not only have these stocks had great growth this year, but they also display a Zacks Rank #1 (Strong Buy) or #2 (Buy) offer the best investment opportunities in the growth investing space.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.To further cut short the list, we selected those stocks that have gained more than 50% in 2016. Further, these have a market capitalization of over $1 billion.
Below we’ve compiled a list of some of the energy market’s best stocks so far in 2016.
McDermott International Inc. MDR: Incorporated in 1959, Houston, TX-based McDermott International is an engineering and construction company, solely focused on the offshore oil and gas business.
Zacks Rank: #1
Market Cap: $1.8 billion
% Price Change (YTD): +125.97%
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Encana Corp. ECA: Based in Calgary, Alberta, Encana is a focused pure-play natural gas exploration and production (E&P) company. It is the second largest gas producer in North America, and holds a highly competitive land and resource position in a number of the region's most promising shale and tight gas resource plays.
Zacks Rank: #2
Market Cap: $11.9 billion
% Price Change (YTD): +139.88%
Chesapeake Energy Corp. CHK: Oklahoma-based Chesapeake Energy is an independent oil and gas company engaged in the acquisition, development, and production of onshore U.S. natural gas resources.
Zacks Rank: #2
Market Cap: $6.5 billion
% Price Change (YTD): +63.11%
Diamondback Energy Inc. FANG: Midland, TX-based Diamondback Energy is an independent exploration and production company engaged in the acquisition, finding and development of unconventional onshore oil and gas properties.
Zacks Rank: #2
Market Cap: $9.1 billion
% Price Change (YTD): +53.56%
Although it’s been a rough year for much of the energy market, these stocks have had impressive success. While these firms have already been performing well, they all possess a strong Zacks Rank, meaning that their growth isn’t necessarily over yet.
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