OPEC members and their non-OPEC allies, together called OPEC+, agreed to a production cut extension until July-end. The 9.7-million barrels per day (bpd) of oil production cut had a somewhat positive effect on crude prices, which revived from the negative zone as the May futures market tanked on rising inventories. Extension of the output curb is a huge positive for the market as this time, producers who failed to comply earlier will compensate.

Better Compliance Ahead

Countries like Iraq, Nigeria, Angola and Kazakhstan that exceeded production quotas in May and June are now expected to not only deepen cuts but also compensate for their extra output in July, August, and September. This move was much needed, given the fact that global storage capacity is under stress. However, ceasefire in Libyas civil war can bring back more oil supplies to the market. This will likely reduce the effect of the output cut extension.

Improving Demand

With the supply side showing signs of stabilization, the demand side of the market is required to play a pivotal role in pushing crude prices to above $50 per barrel from the current level of around $40. The gradual lifting of coronavirus-induced lockdowns by global economies will push demand for energy products higher, significantly drawing more from the inventories.

The process of reopening of economies can take time. Scott D. Sheffield, CEO of Pioneer Natural Resources Company PXD, stated that the reopening of several economies will result in a rebound in demand to the range of 94-95 million bpd in the coming days. However, it will likely take two to three years for demand to reach pre-pandemic levels.

Unemployment Declines

The United States is bouncing back from the shutdowns, giving investors reason for more optimism. Importantly, the U.S. economy added 2.5 million jobs in May, dragging the unemployment rate down to 13.3% (might include a misclassification error of 3 points) from 19.7% (adjusted) in April. Even after making adjustments, the data shows positive signs, contradicting most forecasters prediction of near 20% unemployment in May. The declining unemployment rate is delighting for investors in the energy sector as it would translate to higher energy demand.

Low Price Blocking New Wells

Its true that as crude prices are recovering from historic lows to around $40 per barrel, the early signs of shale recovery are in sight. EOG Resources, Inc. EOG, one of the biggest shale producers, is expected to bring much of the curtailed production back online in the third quarter. Another shale player, Parsley Energy, Inc. PE also intends to resume a vast majority of its curbed production this month.

Although these producers will likely resume output, it is expected in the form of opening up of paused wells rather than drilling brand new wells. The current price level of $40 per barrel is discouraging most of the producers to dig new wells. As the wells in the shale plays have relatively lower life span compared with other resources, these are anticipated to dry eventually. As such, analysts are expecting a decline in shale output in the long run, given that price remains in the current levels. That might not be the case for producers in offshore resources.

Oil producers with significant offshore exposure are expected to gain a lot from their wells under the sea beds that have a longer life span and low decline rates than shale wells. Due to their long reserve lives, offshore producers will be able to maintain production levels without incurring the cost of digging new wells. As such, with demand expected to improve with withdrawal of lockdowns, offshore producers are expected to gain further.

Our Picks

One stock with heavy offshore activities is Exxon Mobil Corporation XOM. Its discoveries in the prolific Stabroek Block, located off the coast of Guyana, are remarkable. Moreover, this Zacks Rank #2 (Buy) company projects daily Guyana oil production volumes of more than 750,000 gross barrels by 2025. Importantly, the pandemic hasnt affected current operations offshore Guyana, as revealed by the company. You can seethe complete list of todays Zacks #1 Rank (Strong Buy) stocks here.

W&T Offshore, Inc. WTI is a leading oil and natural gas explorer with operations primarily focused on resources located off the coast of Gulf of Mexico (GoM). The prolific oil and gas offshore fields in the GoM shelf have been primarily boosting the companys production since inception. New discoveries in those fields, located at a water depth of 500 feet, will likely boost its production further. It currently has a Zacks Rank #2 at present.

Story continues

See original here:

3 Offshore Oil Stocks to Buy as OPEC+ Extends Production Cuts - Yahoo Finance