A combination of supply disruptions and a turnaround in the stance of a major investment bank boosted oil prices to a six-month high on Monday. A demand supply gap had pushed prices down for an extended period. This was an outcome of a fall in demand to worldwide economic sluggishness and oversupply from major oil producing nations.

However, the continuing impact of supply side disruptions and the possibility of a further decline in shale output have changed the outlook on oil. The rest of the year is likely to see higher prices which make this a good time to add oil stocks to your portfolio.

Supply Shortages Spark Price Gains

Oil prices rebounded on Monday after Goldman Sachs Group, Inc. (GS) said that the oil market is facing a deficit in crude production following production disruptions in Nigeria and Canada. A series of recent militant attacks on oil infrastructure in Nigeria reduced its crude production to 1.69 million barrels per day (bpd), hitting its lowest level in 22 years.

Further, a wildfire that broke out in Fort McMurray, Canada dragged crude output to 1.6 million bpd. Goldman also said that "the oil market has gone from nearing storage saturation to being in deficit much earlier than" it expected.

A few months ago, Goldman Sachs projected that oil prices would remain around $20 per barrel following crude oversupply. However, it said yesterday that WTI crude may reach near $50 per barrel in the second half of this year and might experience modest increases next year. Both the WTI crude and Brent crude settled at their highest level since Nov 3.

EIA Projects Decline in Shale Output

Additionally, the U.S. Energy Information Administration (EIA) said that shale production is likely to decline in June. This would be the eighth consecutive monthly drop in prices. According to the EIA, output from shale producers may decline by around 113,000 barrels per day (bpd) to 4.85 million bpd.

This is a direct outcome of a decline in prices extending over two years. Consequently, profitability of shale drillers has been grievously hit, leading to such a projection. The EIA believes that production at the Eagle Ford shale play will decline by 58,000 barrels next month. The Bakken Shale play will experience the second largest decline in output, a projected fall of 28,000 barrels per day.    

Our Choices

Fresh evidence indicates that the slump in oil prices is over and crude may be on its firmest footing in recent times. Projections indicate that prices may move higher in the near term to touch the $50 mark.

This is why it would be a good time to pick oil stocks with strong fundamentals. Selecting winning stocks, however, may be a difficult proposition.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Tallgrass Energy GP, LP (TEGP - Snapshot Report) is a limited partnership company. The company is engaged in the transportation, storage and processing of natural gas, the transportation of crude oil and the provision of water business services.

Tallgrass Energy GP has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 72.6% for the current year. Its earnings estimate for the current year has improved by more than 91.3% over the last 30 days.

World Point Terminals, LP (WPT - Snapshot Report) is an owner, operator, developer and buyer of terminals and other assets relating to the storage of heavy refined products, light refined products and crude oil.

World Point Terminals has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of 18.4% for the current year. Its earnings estimate for the current year has improved by 7.1% over the last 30 days.

Transocean Partners LLC (RIGP - Snapshot Report) owns, operates and acquires modern, technologically advanced offshore drilling rigs.

Transocean Partners has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of 23.1% for the current year. It has a PEG ratio of 0.46.

Murphy USA Inc. (MUSA - Snapshot Report) is a retailer of gasoline products and convenience store merchandise primarily in the U.S.

Murphy USA has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of 42.1% for the current year. Its earnings estimate for the current year has improved by 3.3% over the last 30 days.