Oil Stocks to Buy as Global Oil Supplies Reach Equilibrium

After briefly dipping back into the $40s last month on oversupply worries, crude oil has recently clawed its way back above $50 a barrel. Driving that recovery is fresh data suggesting that supply and demand are nearly balanced. It's that view of a more balanced oil market that has had oil companies ratcheting up spending this year to capture the higher prices that should come as the market continues to stabilize. This activity increase bodes well for leading oil-field service and equipment companies Halliburton (NYSE: HAL), National Oilwell-Varco (NYSE: NOV), and Schlumberger (NYSE: SLB), which would benefit from the one-two punch of rising volumes and prices later this year.

Tightening up

According to the International Energy Administration's (IEA) latest market report, global oil demand is expected to grow by 1.3 million barrels (bpd) this year. While that's slower growth than last year and a bit below its initial forecast following weak first-quarter demand growth, it still suggests that the world needs more oil this year than it consumed last year.

Image source: Getty Images.

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Meanwhile, supplies fell by 755,000 bpd in March thanks to a combination of output cuts from OPEC and non-members. That said, non-OPEC production is expected to rise 485,000 bpd this year, recovering from last year's 790,000 bpd decline that resulted from a resurgence in shale output. That's after companies such as leading Bakken Shale producer Whiting Petroleum (NYSE: WLL) plan to reverse deep spending cuts. In Whiting's case, it plans to double its capital expenditures budget to $1.1 billion, which puts it on pace to grow production 23% from the first quarter to the fourth quarter. While it's an aggressive budget that requires $55 oil to break even, the plan shows Whiting's confidence that the oil market should rebalance this year and therefore should need more oil by year-end. Moreover, even with rising shale output, the IEA expects the oil market to tighten throughout the year.

Buying into the recovery

Because oil market forces are nearing equilibrium, shale drillers have shifted their focus from survival to capturing the upside of the recovering oil market. As Halliburton CEO Dave Lesar put it on last quarter's conference call, "Animal spirits have broken free, and they are running." Furthermore, Lesar noted that "customers are excited again, and our conversations have changed from being only about cost control to how we can meet their incremental demand."

Image source: Getty Images.

Because of that, Lesar expects that not only will service volumes improve this year, but that the company can increase prices. In fact, Halliburton expects to increase prices by more than 10% this year on the view that rapidly rising customer demand should cause shortages. Schlumberger, likewise, sees rising demand fueling price increases later this year. In Schlumberger's view, investment by E&P companies in North America will increase 30% this year, which "should lead to both higher activity and a long overdue recovery in service industry pricing." The company has already started negotiating with customers on price increases, which should drive rapid profit growth later this year.

The rise in drilling activities will not only benefit the industry's top two service companies but also its leading equipment supplier, National Oilwell Varco. That's because the surge in activities will fuel more demand for consumables like drill pipe, and it should eventually cause equipment to start burning out, requiring customers to restock. That was certainly the case last quarter when the company's financial resultsfinally started reboundingas a result ofsharply rising demand in North America. Meanwhile, the fact that drillers expect to put more rigs to work over the course of the year thanks to a rebalancing oil market suggests this trend should continue. That outlook led CEO Clay Williams to say that National Oilwell Varco is "look[ing] forward to a brighter year ahead."

Investor takeaway

With supply and demand coming back into balance, it's giving oil companies the confidence to ramp up spending this year. That bodes well for top-tier service and equipment companies Halliburton, Schlumberger, and National Oilwell Varco, which should benefit not only from rising volumes but also the ability to pass through price increases to customers. That's what makes them greats stocks to buy as the oil market gets back into balance.

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Matt DiLallo owns shares of National Oilwell Varco. The Motley Fool owns shares of and recommends National Oilwell Varco. The Motley Fool has a disclosure policy.