5 Oil & Gas Stocks That Could Brave Sector Bloodbath
Zacks Investment Research | Dec 19, 2018 11:49PM ET
The oil and gas sector has been through several ups and downs in 2018. While oil prices rallied to multi-year highs from a decent start this year, natural gas prices picked up pace during the second half of 2018. However, the surge in oil prices was short-lived. Natural gas, on the other hand, currently stands at a significantly higher level than its starting point. The movement in prices and the current geopolitical scenario have given investors an idea regarding the future of hydrocarbons. To get a better hold of the future and idea about how to invest in the oil and gas sector, one needs to understand the developments in the space this year.
Oil and Gas Prices in 2018
Struggling Oil: WTI crude, the American benchmark, started the year just above $60 per barrel of oil and climbed to a multi-year high of $76.41 on Oct 3, primarily due to U.S. sanctions on Iran. The drastic fall in Iranian crude exports prior to the sanctions helped to drive oil prices higher. However, several factors including waivers to some heavy oil-importing countries, existing oil supply glut and fears that an economic slowdown will dampen the demand outlook led to a sharp fall in oil prices. The OPEC-led output cut also failed to boost investor sentiment and crude price. Currently, WTI is trading below the $50 per barrel mark.
Strength in Natural Gas: Natural gas price traded below $3 per million British thermal units (MMBtu) at the start of the year, which jumped above $4.80 per MMBtu in November. The rise in price level can be attributed to several factors like increasing demand in winter for room heating purposes, replacing coal as the top choice for electricity generation in the United States, rising need for cleaner energy resources, low U.S. gas stockpiles, nuclear power plant outages and others. Currently, the Henry Hub natural gas spot price stands at $3.80 per MMBtu.
It is to be noted that the oil sector has underperformed the S&P 500 composite so far this year. The S&P 500 saw a decline of 4.5% year to date compared with the oil and gas sector’s collective fall of 16.7%.
What Lies Ahead?
The supply glut in the oil market is not expected to go any time soon, as a surge in demand in the near future is not prominent. Moreover, the waivers on Iran oil sanctions are likely to continue till April. Per International Energy Agency (IEA), global surplus in the fourth quarter will touch 0.7 million barrels per day (MMBbls/d). Moreover, the surplus could rise to 2 MMBbls/d in the first half of 2019, IEA added. The bearish global demand outlook further dampens investor sentiment. Hence, an immediate rise in crude prices is not on the horizon.
Meanwhile, natural gas production is expected to continue increasing in the coming days, per Energy Information Administration (EIA). The agency anticipates output to increase 11% this year to record levels. This will likely lead to lower natural gas prices. Per EIA, Henry Hub natural gas spot price in 2019 is expected to average $2.98 per MMBtu, lower than current year’s expected average of $3.01 per MMBtu.
In short, the oil and gas sector is up for a bloodbath. Now let’s focus on some oil and gas stocks, which can make investors cheerful even in the current volatile market pricing scenario.
Stocks That Can Outperform the Sector
Here we have highlighted a few stocks that are poised to outperform the oil and gas sector in 2019. These companies have a market capitalization of more than $1 billion, making them large enough to stay strong even in the face of unfavorable events. Moreover, these stocks either have a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see Zacks Investment Research
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