After global economic slowdown fears and higher supply especially from the United States, subdued crude oil prices for a month and half, a turnaround showed up recently on heightened geopolitical conflict with Iran.
Disturbances in Iran intensified on Jul 18 after President Donald Trump declared that the U.S. Navy destroyed an Iranian drone in the Strait of Hormuz in a defensive action. The USS Boxer, an amphibious assault ship, took down the drone in the Strait of Hormuz, responsible for the passage of 20% of total crude oil being consumed globally.
Crude Oil Prices Jump
On Jul 18, the U.S. benchmark West Texas Intermediate (WTI) crude gained 97 cents or 1.8% to settle at $56.27 a barrel. Global benchmark Brent Crude went up $1.28 or 2.1% to settle at $63.21 a barrel. Notably, both benchmark oil prices witnessed the first closing in positive territory after a losing streak of four straight days.
Iran Conflict Likely to Escalate
Disturbances in Iran intensified on Jun 13 when two oil tankers were set on fire in the Strait of Hormuz, for which the United States blamed Tehran. On Jun 20, Iran’s Revolutionary Guard claimed that it recently shot down a U.S. drone near the Strait of Hormuz. Iran alleged that the drone had entered its sky, which the U.S. military claimed as international airspace.
On Jun 21, President Donald Trump tweeted “Iran made a very big mistake!” but refrained from a military strike on Iran. Notably, Iran is already facing U.S. sanctions regarding crude oil exports after the Trump administration withdrew from the Iran Nuclear Agreement of 2015.
It goes without saying that while the Saudis and the United States are on one side, the Houthi Yemenis and Iran are on the other. Iran has reportedly warned that if its economy is hit due to America’s sanction on its crude export, it will then attempt to disrupt the passage of oil tankers through the strait. This could further constrain global oil supply. The news in fact has already bumped up oil prices.
Likely Rate Cut by the Fed to Boost Oil Prices
On Jul 18, at the annual meeting of the Central Bank Research Association, New York Federal Reserve President John Williams said, “It’s better to take preventative measures than to wait for disaster to unfold.” Later that day, Fed Vice Chair Richard Clarida said on Fox Business News that cutting interest rates quickly would be a good strategy.
These two comments from two important members of the Fed’s FOMC raised investors’ expectations that the central bank is likely to reduce benchmark rate by 50 basis points in July. Currently, the benchmark lending interest rate is at 2.25-2.5%.
Notably, On Jul 10, in a testimony to the House Financial Services Committee, Fed chair Jerome Powell gave a clear indication that Fed will reduce benchmark market rate in July.
Per CME FedWatch, before Jul 18, respondents assigned 100% probability to a 25 basis-point cut while probability for a 50 basis-point cut was hovering around 20-30%. However, after yesterday’s developments, respondents are now assigning 50% probability to a 50 basis-point rate cut in July. Reduction of market interest rate is likely to boost the U.S. economy thereby raising demand for crude oil.
Our Top Picks
At this stage, it will be prudent to invest in oil stocks that are likely to beat earnings estimates in the second quarter. We have narrowed down our search to five oil stocks. Each of these stocks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy) and has a positive Earnings ESP. You can see the complete list of today’s Zacks #1 Rank stocks here.
Our research shows that for stocks with the combination of a Zacks Rank #3 or better and a positive Earnings ESP, the chance of an earnings beat is as high as 70%. These stocks are expected to climb after earnings release irrespective of already solid gains year to date.
The chart below shows price performance of our five picks year to date.
Helix Energy Solutions Group Inc. HLX is an offshore energy services company, provides specialty services to the offshore energy industry primarily in Brazil, the Gulf of Mexico, North Sea, the Asia Pacific, and West Africa regions. The company operates through three segments: Well Intervention, Robotics, and Production Facilities. The stock sports a Zacks Rank #1.
Helix Energy Solutions has an Earnings ESP of +7.61% for the current quarter. The company has an expected earnings growth rate of 25% and 57.9% for the current quarter and year, respectively. The Zacks Consensus Estimate for both the current quarter and year improved 7.1% over the last 60 days.
The company delivered positive earnings surprise in three out of the last four quarters with an average beat of 71.9%. Helix Energy Solutions is expected to release earnings results on Jul 24, after the closing bell.
Earthstone Energy Inc. ESTE is engaged in the development and operation of oil and gas properties in the United States. Its asset portfolio includes the Midland Basin of west Texas and the Eagle Ford trend of south Texas. The stock carries a Zacks Rank #2.
Earthstone Energy has an Earnings ESP of +4.50% for the current quarter and an expected earnings growth rate of 900%. The Zacks Consensus Estimate for the current quarter and year improved 25% and 2.2%, respectively, over the last 60 days.
The company delivered positive earnings surprise in two out of the last four quarters with an average beat of 80.2%. Earthstone Energy is expected to release earnings results on Aug 5.
Independence Contract Drilling Inc. ICD provides land-based contract drilling services for oil and natural gas producers in the United States. It constructs, owns, and operates a fleet of pad-optimal ShaleDriller rigs in the Permian Basin and the Haynesville Shale. The stock carries a Zacks Rank #2.
Independence Contract Drilling has an Earnings ESP of +18.18% for the current quarter. The company has an expected earnings growth rate of 50% and 105.9% for the current quarter and year, respectively. The company delivered positive earnings surprise in the last four quarters with an average beat of 111.1%. Independence Contract Drilling is expected to release earnings results on Aug 1.
Enterprise Products Partners L.P. EPD provides midstream energy services to producers and consumers of natural gas, natural gas liquids, crude oil, petrochemicals and refined products. The company operates through four segments: NGL Pipelines & Services, Crude Oil Pipelines & Services, Natural Gas Pipelines & Services, and Petrochemical & Refined Products Services. The stock carries a Zacks Rank #2.
Enterprise Products Partners has an Earnings ESP of +5.29% for the current quarter. The company has an expected earnings growth rate of 10.9% and 11% for the current quarter and year, respectively. The Zacks Consensus Estimate for the current quarter and year improved 4.1% and 2.9%, respectively, over the last 60 days.
The company delivered positive earnings surprise in the last four quarters with an average beat of 17%. Enterprise Products Partners is expected to release earnings results on Jul 31, before the opening bell.
Laredo Petroleum Inc. LPI is engaged in the acquisition, exploration and development of oil and natural gas properties in the Permian Basin of West Texas. It also provides midstream and marketing services comprising transportation and marketing of oil and natural gas as well as natural gas lift systems, crude oil and natural gas gathering, and water delivery and takeaway services.
The stock carries a Zacks Rank #2. Laredo Petroleum has an Earnings ESP of +1.91% for the current quarter and is expected to release earnings results on Jul 31, after the closing bell.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Enterprise Products Partners L.P. (EPD) : Free Stock Analysis Report
Helix Energy Solutions Group, Inc. (HLX) : Free Stock Analysis Report
Independence Contract Drilling, Inc. (ICD) : Free Stock Analysis Report
Earthstone Energy, Inc. (ESTE) : Free Stock Analysis Report
Laredo Petroleum, Inc. (LPI) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research