The last few months have been tumultuous for oil prices. The commodity started 2020 above $60 a barrel, dropped to negative territory in April and then staged a remarkable turnaround to hit a four-month high of over $40 recently.
Going into the second half of the year, there seems to be plenty of uncertainty about oil’s future direction. While expectations are for prices to slowly drift higher on tightening fundamentals, there are plenty of factors clouding the picture.
Amid this lack of visibility, investors should buy stocks of companies with strong financial and operational credentials, or, in other words, firms with large market capitalizations.
Crude’s Historic Fall & Stunning Rebound
U.S. oil prices posted a gain of 92% over the past three months - the largest quarterly increase since the 1990 Gulf War. Interestingly, for the three-month period ending Mar 31, WTI prices fell 66.5% - the largest quarterly percentage decline on record.
The twin bearish shocks of coronavirus-forced demand contraction and the OPEC oil price war triggered a spectacular deterioration in the energy market environment. A dramatic collapse saw crude plunge below zero for the first time in history on Apr 20. With major cities under lockdown and travel restrictions in place, the consumption for crude dropped by as much as 30%.
The speed of oil’s fall forced the OPEC+ group to come to the table. The coalition between OPEC countries under kingpin Saudi Arabia and non-members led by Russia started to withhold output by 9.4 million barrels per day since May. Further, there have been signs of modest recovery in gasoline (and therefore, crude) demand on renewed economic activity and easing of lockdown restrictions. Finally, as a response to the bearish environment, the shale fraternity – especially the ones whose production mix is heavily tilted towards crude – has scaled back drilling activity and cut their capital budgets significantly.
Buoyed by these developments, WTI crude rallied to a four-month high of 40.90 a barrel on Wednesday.
The Future Path of Oil Remain Unpredictable
While oil prices have staged a phenomenal recovery in just three months, traders remain worried about the future direction of the commodity.
Investors remain worried of the supply glut. In total, U.S. commercial stockpiles are up by more than 19% since March, while domestic fuel demand, though improving, remains weak. As it is, another build in distillate inventories in the latest EIA weekly report, taking supplies to 37-year high, kept traders worried. Moreover, refinery utilization in the United States remains far below the usual capacity usage at this time of the year.
Crude is also being pressured by the second wave of coronavirus infections. As several U.S. states experience a spike in new coronavirus infections and hospitalization, there are apprehensions about another set of containment measures – already in place in certain regions - which might force many businesses to close again just after reopening. Moreover, this would create doubts around the trajectory of oil’s demand recovery. Further complicating things, crude’s rise from the bottom could also encourage the shale patch to ramp up or resume drilling activities.
Opt for the Safety of Large Caps
Overall, it appears that the oil market is at a crossroads. Over the past few weeks, large but opposing forces have kept WTI hovering around $40 per barrel.
But it’s important to keep in mind that even in these tumultuous times, there are some stocks that stands out.
Amid the uncertainty, it is necessary that investors adopt a cautious approach. It is prudent to opt for large cap stocks. These have a market capitalization of over $10 billion, and also have further room for upside. These companies enjoy leading market positions, have a global footprint, strong cash positions and are large enough to stay strong even in the face of unfavorable events. While adding these stocks to your portfolio looks prudent, picking winning stocks may be difficult.
Here, Zacks’ proprietary methodology comes in handy. Our research shows that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer good investment opportunities. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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We have narrowed down our search to the following Zacks Rank #2 stocks:
ExxonMobil XOM: ExxonMobil's bellwether status in the energy space, optimal integrated capital structure that has historically produced industry-leading returns, and management's track record of capex discipline across the commodity price cycle make it a relatively lower-risk energy sector play. This Irving, TX-headquartered company’s expected EPS growth rate for three to five years currently stands at 12.7%, comparing favorably with the industry's growth rate of 3.3%.
Chevron CVX: Like ExxonMobil, Chevron is one of the largest publicly traded oil and gas companies in the world with operations that span almost every corner of the globe. A component of the Dow Jones Industrial Average, San Ramon, CA-based Chevron is fully integrated, meaning it participates in every aspect related to energy – from oil production, to refining and marketing. Over 30 days, the company has seen the Zacks Consensus Estimate for 2020 increase 39.1%.
Royal Dutch Shell plc RDS.A: Royal Dutch Shell is also one of the primary oil supermajors - a group of U.S. and Europe-based big energy multinationals with operations that span almost every corner of the globe. The Hague, Netherlands-headquartered company’s expected EPS growth rate for three to five years currently stands at 5%, comparing favorably with the industry's growth rate of 3.3%.
Hess Corporation HES: Hess is primarily an exploration and production company. The New York-based operator has made some made world-class oil discoveries at the Stabroek Block, located off the coast of Guyana. Over 30 days, the company has seen the Zacks Consensus Estimate for 2020 increase 20.4%.
Pioneer Natural Resources Company PXD: Pioneer Natural Resources is an explorer and producer of oil, natural gas and natural gas liquid. The leading upstream energy firm primarily has operations in the Permian, the most prolific basin in the United States. Over 30 days, the company has seen the Zacks Consensus Estimate for 2020 increase 7.1%.
These Stocks Are Poised to Soar Past the Pandemic
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