Oil & Gas Industry Outlook – November 2017

Crude Oil

Things can change very quickly in the oil market.

Just a few months ago, or until September, the commodity had a very difficult year. In June, U.S. West Texas Intermediate (WTI) fell to nearly $42 a barrel – the lowest in ten months.

Since then, the contract has risen about 30%. In fact, WTI hit a more than two-year high of above $55 recently. Therefore, it is not surprising that the Dow Jones industrial average’s two energy giants –– Zacks Rank #1 (Strong Buy) ExxonMobil (XOM – Free Report) and Chevron (CVX – Free Report) –– returned +9% and +7%, respectively, since September –– significant rises considering their status as ‘traditionally defensive plays’. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

What’s Fueling the Bullish Market Sentiment?

Unlike other short-lived rallies over the past three years, we believe the current higher oil prices are a result of improving fundamentals.

Talks of Oil Production Cut Deal Extension: One of the significant reasons why the U.S. oil benchmark is soaring, revolves around expectations that OPEC and other major producers will agree to expand their output-cut deal beyond March. The agreement, already renewed once, keeps 1.8 million barrels a day (or 2% of global supply) off the market in an attempt to clear a supply glut. While there are several question marks over the degree to which the cartel members are adhering to their quotas, there’s no ignoring the fact that the cuts continue to narrow the market imbalances.

Sharp Inventory Drawdowns: Investors have pinned hopes of recovery over the recent U.S. Energy Department’s inventory releases that show multiple weeks of strong inventory draws in the domestic crude stockpiles – pointing to a slowdown in shale output. The nation’s oil stockpiles have shrunk in 24 of the last 30 weeks and are down almost 80 million barrels since April.

The Shift into “Backwardation”: Recently, the front-month WTI contract have shifted into “backwardation” – a phenomenon when near-term oil futures trade at a premium to futures dated further out. Analysts consider this as a bullish signal with the so-called backwardated market helping flush out inventories by eliminating the incentive to put oil in storage.

Fall in Rig Count: According to Baker Hughes’ closely watched weekly report, the oil rig count has gone down for a ninth week in 12. This implies that U.S. energy firms are cutting down on their capital investment plans. Importantly, this is an indicator that U.S. shale producers are showing signs of slowing down.

Booming Exports: The United States has never exported more than 2 million barrels of crude oil per day. During the week through Oct 27, the nation exported 2.13 million barrels a day of light oil, way higher than 400,000 barrels shipped after the lifting of the four-decade-long ban on oil exports at the end of 2015. This clearly reflects the substantial demand for U.S. oil.