One of the most profitable areas of the equity market remains energy. As demand for oil continues to scale upward, topping 100 million barrels per day this year, the energy sector is positioned to boost your portfolio in the New Year. Thus, zeroing down on the oil stocks poised to stand out as top investments for next year seems judicious.
Oil analysts were cautious at the beginning of 2018, with oil prices at around $50 a barrel. But, crude prices surged to the $70s by mid-year on the Trump administration’s decision to reimpose sanctions on Iran, which significantly impacted supplies.
However, the oil rally came to an abrupt halt toward the end of the year. After all, the supply-demand disparity increased after the Trump administration decided to relax sanctions on the purchase of Iranian oil by granting waivers to eight buyers of Tehran’s crude, dragging crude oil below $50 a barrel.
With crude prices near $50 a barrel at the end of this year, the outlook for the year ahead is certainly muddied. Slowdown in demand growth, in the meanwhile, is doing no good either. Oil demand was initially expected to rise by more than 1.5 million barrels per day in 2019, per the International Energy Agency (IEA).
But, the agency recently lowered its forecast by 110,000 barrels per day due to a weakening global economy. Trade-related issues between the United States and China after the economies levied tariffs on each other’s commodities to protect domestic industries and jobs dampened global growth.
However, OPEC (consisting oil-producing nations Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Gabon, Angola, Equatorial Guinea and Congo) has steeped in to stabilizing oil prices in the New Year. OPEC and a number of its allies, including Russia, will introduce production cuts to take out 1.2 million barrels per day from the oil market in January 2019.
U.S. production growth may also get hampered next year due to pipeline bottlenecks, something that bodes well for oil prices. Takeaway constraints in the Permian Basin at least through the first half of 2019 are expected to persist.
Some skeptics may argue that in the second half of 2019, once new pipelines start to bring Permian oil to the market, U.S. production will rise exerting pressure on oil prices. Then again, OPEC could offset that surge by extending production cuts. Lest we forget, OPEC and its alliance will catch up in April to decide whether market conditions require keeping the curbs in place.
With oil supplies and demand widely expected to be back into balance, oil analysts expect a recovery in prices at least in the first six months of 2019. Nearly 24 oil analysts in a Bloomberg survey projected Brent crude, the international benchmark for oil prices, to average $70 a barrel in 2019, while the median forecast for West Texas Intermediate crude is $61.13.
By the way, the Brent recently dropped below $50 a barrel for the first time since July 2017, while the West Texas Intermediate managed to bounce off a one-and-a-half year low at $42.36 a barrel.
Investment banks, in the meantime, now see Brent crude average about $68-$73 a barrel next year.
And when it comes to U.S. crude, the forecast is between $59 and $66 a barrel.
With world’s biggest banks and oil experts reckoning on a rebound in oil prices next year, investing in oil companies best positioned for the year ahead seems prudent. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
SilverBow Resources, Inc. SBOW engages in the exploration, development, and production of oil and gas from the Eagle Ford Shale in South Texas. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for its next-year earnings rose 7.7% in the past 60 days. The company is expected to return 166.7% next quarter.
Unit Corporation UNT operates as a diversified energy company in the United States. The company operates through three segments: Oil and Natural Gas, Contract Drilling, and Mid-Stream. The stock currently has a Zacks Rank #1. The Zacks Consensus Estimate for its next-year earnings increased 16.7% in the past 60 days. The company is likely to return 28.6% next quarter.
Approach Resources, Inc. AREX focuses on the acquisition, exploration, development, and production of unconventional oil reserves in the United States. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for its next-year earnings moved 16% up in the past 60 days. The company is expected to return 28.6% next quarter.
Phillips 66 Partners LP PSXP owns, operates, develops, and acquires crude oil. The stock currently has a Zacks Rank #2. The Zacks Consensus Estimate for its next-year earnings increased 7.4% in the past 90 days. The company is expected to return 28.6% next quarter.
Shell Midstream Partners, L.P. SHLX owns, operates, develops, and acquires pipelines and other midstream assets in the United States. The stock currently has a Zacks Rank #1. The Zacks Consensus Estimate for its next-year earnings increased 8.6% in the past 60 days. The company is expected to return 166.7% next quarter.
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