Morgan Stanley Doubtful Over OPEC Production Cut: 4 Picks
Zacks Investment Research | Aug 22, 2016 10:52PM ET
After the prolonged weakness in oil prices, investors can finally see a ray of hope as big oil producers have decided to work out a production freeze when they meet next month. However, we want to warn speculators and investors that crude output freeze is highly unlikely, if we go by Morgan Stanley (NYSE:MS) , a leading financial services holding company headquartered in New York.
But there is nothing to worry about as we have pinpointed five energy stocks that are undervalued and poised to grow even if there is no recovery in oil prices following an unlikely oil production freeze.
Why Oil Production Freeze is Highly Unlikely?
Oil prices rallied almost 20% – especially in an oversupplied commodity market – from a low settlement price of $39.50 on Aug 2 following renewed hopes of a production freeze by the 14-member OPEC bloc and Russia after they will meet next month in Algeria.
However, the output freeze is unlikely to take place according to Morgan Stanley. Let’s analyze the key factors that might hinder their plan.
As per the Morgan Stanley report, OPEC believes that the market will heal the imbalances in oil price automatically. In fact, OPEC is expecting crude to rise further following higher commodity demand during the third and fourth quarters.
Moreover, Saudi Arabia – which dominates OPEC – is still in war with the shale producers of the U.S. to protect market share. This was revealed by the Saudi data that the production level of the desert country increased from 10.27 million barrels per day in May to 10.55 million barrels a day in June.
Apart from U.S. shale producers, Saudi is also in a war with the resurgent oil sector of Iran. On top of that, Iran is still producing lower than the pre-sanction output levels and is not at all willing to curb output until its production level improves sufficiently.
Additionally, Morgan Stanley believes that a few members of OPEC are in favor of the freeze since oil price is already on a bullrun and rose above the $40 per barrel mark over the past few weeks.
Apart from Morgan Stanley, The Goldman Sachs Group Inc. (NYSE:GS) also made a comment and added that the price rally of crude in August is overdone and the probable output freeze amid plentiful crude supply –which is at a record high – will not be able to recover oil price.
Investors should know that following all these events, oil slipped 3% on Monday afternoon to touch $47.05 a barrel.
Who will Gain if There is No Production Freeze?
Certainly the fate of every energy stock is determined by oil price movements. Now if there is no crude production curb by the major oil producers in the coming month, there might not be any respite to oil prices. Hence, it seems that there is no point for investors to spend their hard earned money on the energy stocks that are positively correlated with oil prices like exploration and production companies, drillers and oilfield services players.
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