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Looming US Sanctions on Iran Could Boost Oil Stocks: 5 Picks

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The United States is gearing up for military action against Iran so that the key trade waterways in the Middle East remain open. There was much tension between the two countries since President Donald Trump backed out of the 2015 Iran nuclear deal in May, but the scenario worsened after Jul 25, when Iran-backed Houthi rebels attacked two Saudi oil tankers that were passing the Bab al-Mandab Strait.

Saudi Arabia, a top exporter of crude oil in 2017 (with $133.6 billion exports), is one of the most prominent allies of the United States. The attack on Saudi tankers has sparked concerns over Iran’s future attempts to block its competitor's oil exports.

Any military action that is taken against Iran, will be by Saudi Arabia. If military intervention is required for a longer period, other countries may also get involved.

Trade tensions have escalated in the last few weeks, with Iranian officials threatening to make the Persian Gulf off-limits for international trade and close the Strait of Hormuz, which is a vital oil transport route, if any hostile actions are taken against the Islamic Republic by Trump.

Strait of Hormuz: A Crucial Link in World Oil Trade

Strait of Hormuz, the world’s most-important oil transit route, connects the Persian Gulf with the Arabian Sea and Indian Ocean. This waterway is the point of connection between the oil-rich Gulf countries and international markets for carrying liquefied natural gas and crude oil. According to the U.S. Energy Information Administration’s estimate, about 18.5 million barrels of oil passed through the waterway per day as of 2016.

Any disruption in this crucial maritime chokepoint will lead to a substantial increase in world energy prices. Following the Jul 25 attack, U.S. Defense Secretary James Mattis said on Jul 27 that the United States is steadfast on keeping international oil transport routes open. This requires keeping the Strait of Hormuz open.

Earlier, Tehran had tried to prevent shipments from passing through this shipping route but was compelled to keep the waterways open. Mattis said that the Pentagon will continue supporting Saudi Arabia, United Arab Emirates, Kuwait and Bahrain to stop Iran from affecting their exports.

Deteriorating U.S.-Iran Relationship Could Push Oil Prices Higher

Iran’s top military chief Qasem Soleimani said earlier in July that if the United States imposes sanctions, Iran’s Revolutionary Guard could give shape to a strategy that would stop any oil shipment from the Middle East altogether.

In fact, the recent spat could eventually lead to disturbance in global oil shipments flowing out of the Gulf countries. The possibility of a U.S.-backed war between Iran and Saudi Arabia could push oil prices higher. And this could make the backdrop favorable for U.S. oil stocks.

4 Oil Stocks to Buy

Bonanza Creek Energy, Inc. BCEI engages itself in acquiring, exploring and developing onshore natural gas and oil sites in the United States. Shares of this Zacks Rank #1 (Strong Buy) company has gained 34.8% year to date. The company has witnessed an upward revision in earnings revision of 23.2% for the current year, over the past one month.

Northern Oil and Gas, Inc. NOG is an exploration and production company based in Wayzata, MN. This Zacks Rank #1 company’s shares have gained 81.5% year to date. Over the last 30 days, the company’s earnings estimates for the current year have been revised 13.8% higher.

California Resources Corporation CRC carries a Zacks Rank #2 (Buy) and is based in Los Angeles. The company explores and produces oil and gas. Shares of California Resources gained 87.3% year to date and its earnings estimates have been revised 630% for the current year over the past four weeks.

Evolution Petroleum Corporation, Inc. EPM acquires and develops oil and gas fields and produces oil and gas using conventional and specialized technology. This is Zacks Rank #2 company’s shares have gained 57% year to date. Over the last 30 days, the company has seen a 7.1% upward revision in earnings estimates for the current year.

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