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Middle East Tensions Perk Up Oil Prices: Here's How to Profit

Tirthankar Chakraborty
The Strait of Hormuz, where the BP-operated oil tanker was "harassed," is touted as the most important global passageway for transporting crude.

Wall Street has generally been apathetic to the issue of tension in the Middle East but flaring up tensions between the United States and Iran, as well as Saudi Arabia and Iran has driven oil prices higher. U.S. benchmark West Texas Intermediate crude for July delivery rose $2.89, or 5.4%, to settle at $56.65 a barrel on the New York Mercantile Exchange, the biggest daily gain since December. Brent crude, the global benchmark, was up 4.3% at $64.45 a barrel on London’s ICE Futures exchange, the highest since May 31 and biggest one-day jump since Jan 9.

Iran’s Revolutionary Guard has claimed that they recently shot down a U.S. drone near the Strait of Hormuz. Iran alleged that the drone had entered Iranian airspace, even though U.S. military is adamant that it was in the international airspace. Moreover, Iran’s Revolutionary Guard’s claim came after U.S. military informed of missile hit on one of Saudi desalination plants and stated that it is likely to have come from Yemen.

It goes without saying that while the Saudis and the United States are on one side; the Houthi Yemenis and Iran make up the other one. The tensions between the Saudis and Iran can primarily be attributed to the U.S. sanctions aimed at reducing Iranian oil exports to zero level. Iran made quite a few attempts to evade such sanctions and even threatened to shut down the Strait of Hormuz if sanctions aren’t lifted.

However, tensions in the Middle East were escalating over the past few weeks following the damage of two tankers from Saudi Arabia, one vessel from Norway, and one from United Arab Emirates by sabotage attacks between the Persian Gulf and Gulf of Oman.

It was wrong of everyone to play down the gravity of the Middle East issue. After all, almost 22.5 million barrels of oil pass through the Strait of Hormuz each day since the beginning of 2018, which is roughly 24% of the world’s daily oil production. So, any disruption can lead to supply-demand disparity, eventually leading to elevated oil prices.

Talking about supply-demand disparity, the Energy Information Administration reports show that U.S. crude supply fell by 3.1 million barrels for the week ended Jun 14. Notably, OPEC’s decision to convene on Jul 1-2 to review its pledge to curb production was also another factor that aided the price surge.

How to Play Oil’s Northward Journey?

From bigwig oil producers to rig operators to pipeline owners to refiners, all witnessed their shares rally, which resulted in the broader S&P 500 to close at a record high. Energy shares in the S&P 500 index, collectively, were up 2.2%. Lest we forget, that energy shares have been one of the poorest performers so far this year, but now this growing turmoil in Middle East will surely lure investors back into energy players.

As crude oil prices move north, prices of essential goods and commodities increase. And value of gold rises when inflation picks up. After all, it acts as a hedge against inflation. In fact, theoretically, more than 60% of the time, gold and crude oil have a direct relationship. Thus, with oil prices moving north, shares of gold mining companies are also poised to gain traction.

5 Top Picks

We have, thus, selected five solid stocks from the aforesaid areas that can make the most of this bullish oil market. These stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Anadarko Petroleum Corporation APC engages in the exploration, development, production, and marketing of oil and gas properties. The company sports a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has moved up 26.3% over the past 60 days. The company’s expected earnings growth rate for the current year is 19% against the Oil and Gas - Exploration and Production - United States industry’s estimated decline of 8.7%.

Approach Resources, Inc. AREX focuses on the acquisition, exploration, development, and production of unconventional oil. The company carries a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 32% over the past 60 days. The company’s expected earnings growth rate for the current year is 23.1% against the Oil and Gas - Exploration and Production - United States industry’s estimated decline of 8.7%.

Evolution Petroleum Corporation EPM engages in the development, production, ownership, and management of oil and gas properties in the United States. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 7.1% over the past 60 days. The company’s expected earnings growth rate for the current year is 9.8% against the Oil and Gas - Exploration and Production - United States industry’s estimated decline of 8.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Holly Energy Partners, L.P. HEP owns and operates petroleum product and crude pipelines. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 3.9% over the past 60 days. The company’s expected earnings growth rate for the current year is 8.8% compared with the Oil and Gas - Production and Pipelines industry’s estimated rally of 3.3%.

AngloGold Ashanti Limited AU operates as a gold mining company. The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has moved up 2% over the past 60 days. The company’s expected earnings growth rate for the current year is 90.6% compared with the Mining - Gold industry’s estimated rally of 17%.

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AngloGold Ashanti Limited (AU) : Free Stock Analysis Report
 
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