4 Top-Ranked Oil Stocks To Buy On OPEC Cuts, Trade Truce

On Jul 2, OPEC decided to extend the existing production cuts till March 2020. In doing so, the oil cartel successfully tided over internal differences, agreeing instead to reaffirm measures that supported oil prices in the recent past. Surging U.S. shale output and global economic sluggishness have forced the production bloc to renew such measures several times now.

However, only a lasting U.S.-China trade deal can provide oil with sufficient upside in the second half of the year. Last week, both sides made major concessions, declaring a truce. Notably, Trump agreed to ease restrictions on Huawei, gladdening investors.

A near-term rate, which looks increasingly likely, would also support higher levels of demand. This is why it still makes sense to bet on select oil stocks at this time.

OPEC Extends Production Controls

Even though the core group has decided to provide an extension to production controls, the deal still needs approval from non-member countries. However, Saudi Energy Minister Khalid al-Falih said on Jul 2 that he was sure these countries, particularly Russia, would agree to the extension.

Currently, production controls stand at around 1.2 million barrels per day. A major factor for enforcing such controls has been the jump in U.S. oil production, particularly from shale-related sources.

However, al-Falih thinks, “U.S. shale will peak and the decline like every other basin in history” over time. And till then such measures would be “prudent for us that have a lot at stake” as well as for those concerned about the global economy, he feels.

Trade Truce, Rate Cuts Key to Upside in 2H19

Despite the extension of production controls, the future of oil prices will largely be determined by trade relations between the United States and China. According to Energy Aspects’ chief oil analyst Amrita Sen, the price outlook will largely be guided by the outcome of the next round of U.S.-China talks.

Speaking to CNBC on Tuesday, Sen said that a lot depends on a U.S.-China trade deal since global demand has declined considerably. But she thinks that there “will be some momentum to solve some of these trade wars,” probably alluding to the run-up to the U.S. presidential elections. Trump would want to do little to roil markets and the economy at this point.

Another factor potentially creating upside for oil prices for the rest of the year is the increasing likelihood of a near-term rate cut. With the Federal Reserve intent on fashioning policy, which would support America’s growth momentum, oil market demand could improve in the near future, thinks Sen.

Our Choices

OPEC’s decision to extend production controls until early next year will go a long way in supporting oil prices in the near future. Upside potential has also been improved by the rising likelihood of better U.S.-China trade relations, especially in the run-up to U.S. presidential elections.

A near-term rate cut by the Federal Reserve would also go a long way in supporting oil market demand. This is why it remains prudent to invest in oil stocks. However, picking winning stocks may be difficult.

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Written By: Zacks Investment Research