Crude oil prices jumped on Sep 15 following a drone attack on the two most precious oil fields of Saudi Arabia, which immediately heightened geopolitical tensions in the Middle East. The drone attack could have a far-reaching impact on oil prices as it eliminated roughly 5% of daily oil supply globally and it is not possible to mitigate these losses immediately.
Crude Prices Spike
On Sep 15, the U.S. oil benchmark West Texas Intermediate (WTI) crude for October delivery surged10.4% or $5.71 to $60.57 a barrel on the electronic exchange Globex. Likewise, the global benchmark Brent crude for November delivery soared $6.97 or 11.6% to close at $67.18 a barrel. Both benchmarks registered their largest daily gain since Feb 2016.
Middle-East Tension Heightens
According to Gulf News, on Sep 14, at around 3:31 a.m. to 3:42 a.m. local time, 10 automated, aerial, combat drones launched an attack on the Abqaiq plant in Buqyaq and the Khurais oil field of Saudi Arabia which is controlled by its state-owned oil company Aramco. This was the first attack on Saudi Arabia’s oil installations after the missile attack during Iraq’s Saddam Hussein regime during the first Gulf war in 1990.
So far, Saudi Arabia has refrained from blaming any country or any specific group for this attack. However, Yemen-based Houthi rebels, who are fighting with the Saudi regime since 2014 after they took over Yemen’s largest city, San’a, claimed responsibility for the attack. Over the years, Saudi-led airstrikes have killed Yemeni civilians. In retaliation, the Houthis have used drones and missiles to attack Saudi Arabia. The Yemeni rebels also targeted oil vessels in the Red Sea.
Meanwhile, the U.S. Secretary of State Mike Pompeo blamed Iran for the Saudi attacks. However, Iran strongly condemned Pompeo claiming that these are “meaningless,” “not comprehensible” and “pointless allegations.” President Donald Trump said that the United States is “locked and loaded” after an attack on Saudi oil fields. However, his government will wait for Riyadh to determine who is responsible for the attack before taking action against any country.
Importance of Drone Attack
The Abqaiq oil field of Saudi Arabia is the world’s largest oil processing facility and crude oil stabilization plant with a processing capacity of producing more than 7 million barrels of oil per day. Khurais is the second largest oil field in Middle-East kingdom with a capacity to explore oil around 1.5 million barrels per day.
After the attack, Aramco will be compelled to cut production by around 5.7 million barrels per day or about 50% of its daily production quota. That is equivalent to about 5% of the global oil supply per day. Aramco is reportedly trying to restore around one-third of capacity or about 2 million barrels of oil exploration by Sep 16.
Per S&P Global Platts, the attack on Saudi oil facilities will effectively eliminate all excess crude oil supply from the international market. In August, Saudi Arabia produced 9.85 million barrels of oil per day. The Aramco has 35-40 days of inventory to meet contractual obligations.
Although, on Sep 15, President Trump authorized the release of oil from the U.S. strategic petroleum reserve to maintain global oil supply, many industry watchers are skeptical about its effectiveness. Per S&P Global Platts, the attack could effectively break the current oil price range of $50-$60 per barrel and lift it to the range of $70-$80 per barrel.
5 Oil Stocks Likely to Win Big
At this stage, investment in stocks engaged in exploration, production, refining and marketing of oil will be lucrative. We have narrowed down our search to five stocks with a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
These stocks have popped in the past one month and have long-term growth potential to gain from oil price hike.
The chart below shows price performance of our five picks in the past month.
Exxon Mobil Corp. XOM explores and produces crude oil and natural gas in the United States, Canada/Other Americas, Europe, Africa, Asia, and Australia/Oceania. It operates through Upstream, Downstream and Chemical segments. Exxon is also involved in the manufacture, trade, transport, and sale of crude oil, petroleum products, and other specialty products, manufactures and markets petrochemicals, including olefins, polyolefins, aromatics and various other petrochemicals.
The company has an expected earnings growth rate of 52.7% for the next year. The stock has surged 4.5% in the past month.
Chevron Corp. CVX is engaged in integrated energy, chemicals, and petroleum operations worldwide. It operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas. The Downstream segment engages in refining crude oil into petroleum products, marketing crude oil and refined products and transporting crude oil and refined products and manufacturing petro-chemical products.
The company has an expected earnings growth rate of 22.2% for the next year. The stock has surged 3.5% in the past month.
TOTAL S.A. TOT operates as an integrated oil and gas company worldwide. It operates through four segments: Exploration & Production, Gas, Renewables & Power, Refining & Chemicals and Marketing & Services. Total SA has a strategic partnership with Tellurian to develop the Driftwood LNG project located in Louisiana.
The company has an expected earnings growth rate of 16.7% for the next year. The stock has soared 6% in the past month.
Eni S.p.A. E is engaged in the oil and gas, electricity generation and sale, and petrochemicals businesses. The company is involved in oil and natural gas exploration, and field development and production activities, as well as liquefied natural gas operations in 43 countries.
The company has an expected earnings growth rate of 25.6% for the next year. The stock has soared 5.9% in the past month.
BP p.l.c. BP is engaged in the energy business worldwide. It operates through three segments: Upstream, Downstream, and Rosneft. BP also produces ethanol, bio-isobutanol, bio-power, and solar energy; transports hydrocarbon products through time-chartered and spot-chartered vessels; and holds interests in onshore wind sites.
The company has an expected earnings growth rate of 15.4% for the next year. The stock has gained 2.7% in the past month.
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