In a meeting on Monday, July 1, OPEC agreed to extend current oil production cuts into the first quarter of 2020. Production cuts are meant to keep oil prices at optimal levels by keeping supply down. OPEC countries will withhold 1.8 million barrels a day from the market as part of the cuts.
Oil companies outside of OPEC do not have to comply with these restrictions. Therefore, they may keep production at maximum levels and benefit from OPEC production cuts that help lift global prices.
Complicating the effect of this deal, is OPEC member Iran’s decision to violate an accord that limits production of enriched uranium. This led the U.S. to re-impose sanctions preventing all business dealings with Iran, which is OPEC’s third largest oil producer. These actions have increased tensions in the Middle East significantly, adding risk to supply stability, which pushes prices higher. Prices could continue to jump if tensions in the region escalate in the coming weeks. And heightened pressure on Iran is likely to help U.S. producers.
However, the EU has managed to get around U.S. sanctions on Iran. A special vehicle for trade has been set up called INSTEX. This is essentially a non-currency trade vehicle that balances trade between the EU and Iran and thereby does not violate the sanctions.
Meanwhile, as with everything else in the global economy, the oil market got a boost from the easing of trade tensions between the U.S. and China at the G-20. The world’s two largest economies back at the table for trade negotiations is good for demand, and therefore prices went higher. If an agreement can be reached, demand and prices will likely jump again.
How to Capitalize
The outlook on oil prices looks favorable for non-OPEC producers in the near- to mid- term, so here are four stocks that could jump up with oil prices. These stocks have all performed better than the industry YTD and have other attractive financial metrics. All four of these stocks are Zacks Rank #3 (Hold) at the moment, due to little earnings revision activity. Despite this fact, these stocks still look promising amid the global oil price uncertainty.
1. Exxon Mobil Corporation XOM
The largest American oil company, with a market cap of $324.23 billion, has outperformed its industry by 4.5% this year. Exxon also has a dividend yield of 4.54% at the moment. Our current Zacks Consensus Estimate calls for XOM’s earnings to shrink by 25.3% this year. Exxon’s EPS figure is then projected to rebound in 2020, with earnings expected to surge 38.77% above our current-year estimate.
2. Chevron Corporation CVX
Chevron is a large oil company with a market cap of $237 billion and is headquartered in San Ramon, California. This year, Chevron’s earnings are expected to fall by 6.91%, but are expected to rebound with a 22.15% increase in the following fiscal year. CVX has outperformed the industry by 6.5% YTD and has the lowest market beta among these four stocks, meaning it fluctuates less with the market than these other choices.
3. Royal Dutch Shell PLC RDS.A
Royal Dutch Shell is largest publicly traded oil company in the world and the fifth largest company in the world. The firm is a vertically integrated oil producer headquartered in the Netherlands and incorporated in Britain. RDS.A is trading at a slight discount compared to the industry, with a forward P/E of 11.25. It is also the only among these stocks with positive projected earnings growth for this fiscal year at 5.81%.
4. BP p.l.c BP
BP is sixth largest oil company in the world and is headquartered in London. BP is up 10% YTD and has a dividend yield of 5.85%. Its earnings are projected to shrink in this year, like the rest of the industry. Looking ahead, BP is projected to grow its earnings next year 1% more than its industry’s average and 12% more than the market.
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Click to get this free report Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report BP p.l.c. (BP) : Free Stock Analysis Report Chevron Corporation (CVX) : Free Stock Analysis Report Exxon Mobil Corporation (XOM) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research