Oil prices recovered on Friday after a report from the International Energy Agency (IEA) and forecasts from leading financial institutions indicated that prices may have bottomed out. This follows a steady recovery in oil prices from their late January lows. Since then, oil prices have rallied nearly 45% to hover around the $40 mark.
Other data suggests that the calm may be short-lived and volatility would continue to plague oil. However, the evidence is largely in favor of a gradual recovery in prices. Given these factors, picking dividend yielding value stocks from the sector would be a prudent option.
IEA Sees Prices Bottoming Out
On Friday, the IEA said that though oil may continue to traverse rough waters going forward, prices may have hit their lowest levels. According to the IEA, the removal of sanctions on Iran and its subsequent comeback as an oil exporter did not have as much an impact as was estimated earlier. The IEA said that Iran’s production increased by 220,000 barrels per day (bpd) in February and the country will only gradually emerge as a factor to reckon with.
The agency also said U.S. crude production is expected to fall by almost 530,000 this year, to 12.4 million bpd. Additionally, the IEA revealed that non-OPEC output declined by 90,000 bpd in the prior month to 57.1 million bpd and is projected to fall further this year. Output is expected to decline by 750,000 bpd in 2016, higher than the previous estimate of 600,000 bpd.
The agency stated that OPEC’s crude output decreased by 90,000 bpd in February to 32.61 million bpd following decline in production in the United Arab Emirates, Nigeria and Iraq. Additionally, the IEA said rising possibilities of an agreement between major oil producing nations to cap production will also support higher prices.
Goldman Sachs, Morgan Stanley Concur
Meanwhile, financial institutions The Goldman Sachs Group, Inc. (GS – Analyst Report) and Morgan Stanley (MS – Analyst Report) have also adopted a positive stance on oil. According to a Goldman Sachs note, oil prices may have bottomed out after hitting their lowest point in 12 years in 2016. Goldman Sachs expects crude price to vary between $25–$45 per barrel during the second quarter, higher than first quarter’s range of $20–$40.
