The OPEC countries have agreed to raise crude oil production but by an amount that appears to be less than market expectations. Such a lesser-than-expected production boost helped oil prices scale north and energy shares end in the green.

Oil prices are expected to climb further in the years ahead as there is a cap on how much Saudi Arabia can produce and it is near the limit. Also, Venezuela’s crude oil output has declined significantly. Meanwhile, production of shale, a substitute for conventional crude oil, has risen by leaps and bounds over the past 10 years.

Banking on this strength in oil prices, investing in sound energy stocks seems prudent.

OPEC Agrees to Smaller-Than-Expected Production

OPEC has decided to raise production; however, the amount seems to be lesser than analysts’ expectations. This has soothed concerns about a crude supply glut in the market. So, how did OPEC react? It said that it would “strive to adhere to the overall conformity level of OPEC-12, down to 100%, as of 1 July 2018”.

The statement clearly means that under the deal inked in November 2016, 12 of the 14 OPEC members at that time agreed to trim output by 1.2 million barrels a day from late-2016 levels. But, it had cut down more than required, resulting in excess output reduction of nearly 624,000 barrels a day. The OPEC members, thus, have now decided to add 624,000 barrels a day into the global market and get back to 100% compliance.

Such an uptick in output, nonetheless, turns out to be less than a likely increase in production by 1 million barrels a day, according to Khalid al-Falih, Saudi Arabia’s energy minister. Nigerian oil minister Ibe Kachikwu added that 1 million-barrel figure would have seen OPEC increasing output by around 700,000 barrels a day, while non-OPEC countries including Russia contributing the rest, according to the Financial Times.

How Did Oil Prices React?

OPEC’s agreement to smaller-than-expected production boost amid a global supply glut helped oil prices scale north. The West Texas Intermediate crude, the U.S. benchmark traded on the New York Mercantile Exchange, jumped by $3.04, or 4.4%, to settle at $68.58 a barrel on Jun 22, its highest finish in nearly a month. The West Texas Intermediate crude finished roughly 5.8% higher last week.

The Brent crude, the global benchmark jumped $2.50, or 3.3%, to reach $75.55 a barrel, rebounding from the prior trading session’s finish at $73.05, which was the lowest for the international benchmark since Apr 17. The Brent crude posted a weekly rise of almost 2.9%.

(Source: oil-price.net)

Factors Beyond OPEC Will Drive Oil Prices

Oil prices, in the meanwhile, are expected to rise as supply growth could face constraints in the near term due to chronic underinvestment in long-term projects by major oil companies in the last three years. And if Saudi Arabia’s intention to increase production level is a concern, one should remember that there is a cap on how much it can produce.

Venezuela’s production level has also gone from bad to worse in the past two months. The country’s output levels have dropped to 1.36 million barrels a day last month, down 600,000 barrels a day from a year ago. The International Energy Agency, in fact, has predicted that the country’s output could fall further to 800,000 barrels per day next year.

By the way, there are chances of a sharp rise in the production of “tight-oil” from shale rocks in the United States. Tight oil production is, currently, at 5 million barrels a day and will propel total U.S. oil output to over 11 million barrels a day, the highest in about 50 years. This is making the United States a significant exporter and in turn will absorb much of the projected growth in demand. Kuwait, Iraq and Iran, in particular, will thus be forced to dump the idea of increasing oil output in the future. Needless to say, shale production in itself is troublemaking for crude oil.   

5 Top Energy Players to Buy Now

Shares of oil and gas companies have moved north on the back of a strong rally in oil prices. And with oil poised to gain traction in the near future, such energy companies are expected to rake in profits and reduce debt. The Energy Select Sector SPDR (XLE) gained 2% on Jun 22, while it has advanced 2.3% so far this year (read more: Energy Insiders Are Buying as Oil Prices Face Hard Landing).

Given such positives, we have selected five solid energy companies to add to your portfolio. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.

Chevron Corporation CVX engages in integrated energy, chemicals, and petroleum operations worldwide. The stock currently has a Zacks Rank #1 and a VGM Score of A. In the last 60 days, seven earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings surged 31.5% in the same period. The company’s expected earnings growth rate for the current year is 130.3% compared with the Oil and Gas - Integrated - International industry’s estimated rally of 13.9%.

Northern Oil and Gas, Inc. NOG engages in the acquisition, exploration, exploitation, development, and production of crude oil and natural gas properties in the United States. The stock currently has a Zacks Rank #1 and a VGM Score of A. In the last 60 days, four earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 38.5% in the same period. The company’s expected earnings growth rate for the current year is 157.1% compared with the Oil and Gas - Exploration and Production - United States industry’s projected rally of 22.7%.

Parsley Energy, Inc. PE engages in the acquisition, development, production, exploration, and sale of crude oil and natural gas properties in the Permian Basin in West Texas. The stock currently has a Zacks Rank #1 and a VGM Score of B. In the last 60 days, 15 earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings jumped 50.4% in the same period. The company’s expected earnings growth rate for the current year is 146.4% compared with the Oil and Gas - Exploration and Production - United States industry’s estimated increase of 22.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.

ConocoPhillips COP explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas (LNG), and natural gas liquids worldwide. The stock currently has a Zacks Rank #2 and a VGM Score of A. In the last 60 days, five earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings climbed 20.2% in the same period. The company’s expected earnings growth rate for the current year is 585% compared with the Oil and Gas - Integrated - United States industry’s estimated rally of 15.7%.

CNOOC Limited CEO explores, develops, produces, and sells crude oil, natural gas, and other petroleum products. The stock currently has a Zacks Rank #1 and a VGM Score of A. In the last 60 days, two earnings estimates moved up, while none moved down for the current year. The Zacks Consensus Estimate for earnings rose 22.7% in the same period. The company’s expected earnings growth rate for the current year is 124.3% compared with the Oil and Gas - Integrated - Emerging Markets industry’s projected rally of 57.2%.

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