Brent crude oil is holding steady above $80/barrel as India is the latest country to curtail imports of Iranian crude oil, validating earlier comments by large commodity merchants that a larger-than-expected hole in Iran production will be hard be fill out by a few producing countries.
Further output losses could push prices even higher as refiners urgently seek replacement barrels elsewhere. Around the world, only Saudi Arabia and, to a lesser extent, United Arab Emirates and Russia have the capacity to pump more.
In this scenario, we review what are the stocks to own in this time of commodity and geopolitical volatility. Below are our top choices.
According to E&E News, India is not planning to buy any crude oil from Iran in November, raising the prospect that Tehran will lose another major customer as U.S. sanctions hit. Indian Oil Corp. and Bharat Petroleum Corp. haven't asked for any Iranian cargoes for loading in November; and Nayara Energy also doesn't plan any purchases. Mangalore Refinery and Petrochemicals Ltd. hasn't made any nominations for that month. Final decisions on purchases aren't due until early October, so the refiners could still change their minds.
President Trump has openly criticized China and Iran at the U.N. Security Council this week, accusing China of seeking to meddle in the 2018 midterm congressional elections, putting more fuel in the so-called "Washington Premium".
This environment is allowing even small companies to raise capital, like Rosehill Resources (ROSE) , tapping the equity markets to build cash war chests. ROSE announced this week a public offering for 6.15 million shares, or roughly $43 million. ROSE focuses on growing production and reserves in the core of the Delaware Basin. ROSE is one of those stocks that fall below the radar of institutional investors because it trades below $10/share and has only $300MM in market cap.
Also, it is fueling a spark in M&A and consolidation among U.S. producers. Even small energy services contractors like Key Energy Services (KEG) looked this week to merge with peer Basic Energy Services (BAS) on a stock-to-stock deal betting on the confidence in the industry recovery.
On the asset side, companies like WildHorse Resource (WRD) are stepping into buying additional acreage in the Eagle Ford shale to boost inventory. WRD is up 27% since mid-august after bottomed for the year, riding the crude oil rally. High oil prices have also allowed capital to be deployed into new basins, like the Merge Play in Oklahoma, where operators like Roan Resources (LNGG) , Jones Energy (JONE) , Cimarex Energy (XEC) and Marathon Oil (MRO) have been active.
However, outlook is still not rosy everywhere as Permian crude oil differentials remain wide. The spread between Cushing and Midland delivery prices settled at $12.36/barrel yesterday or a $22/barrel discount from Brent. The differential has bounced from $18-$12/barrels since early May.
Also, Unipec, the trading unit of top Chinese refiner Sinopec, has put a plan to boost U.S. crude imports on hold as it assesses the impact of the Asian nation's trade war with America, according to company President Chen Bo. It previously planned to raise volumes to 500,000 barrels a day in 2019, compared with 300,000 barrels daily from January to August this year, he said. The reluctance to boost purchases shows how the trade war between the major economies is reverberating in the world of energy trading even though crude isn't yet subjected to tariffs.
The Norwegian Central Bank has asked if the industry be entering a phase of euphoria. We think that won't be the case, at least in the U.S. Shale producers and capital providers learned their lessons form the 2014-2016 crude price slump that led to thousands of bankruptcies around the industry and since then they've taken more conservative approach to spending.