Buy 5 Top Oil Stocks Ahead Of Q2 Earnings On Iran Conflict

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 (NYSE:WMB) 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%.

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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 Zacks Investment Research

Written By: Zacks Investment Research