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A Hawkish Fed Can't Burst Oil's Bubble

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The Fed’s resolute stand on battling inflation had the markets swooning Friday. But there was one bright spot.

The Fed intends to raise interest rates and keep them high until the inflation rate comes back down to the targeted sub-2% level. And it intends to do whatever it takes to get there. "Reducing inflation is likely to require a sustained period of below-trend growth," Powell said. It could also lead to a recession.

"While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation,” he said in no uncertain terms. “But a failure to restore price stability would mean far greater pain."

As may be expected, the markets didn’t take the news well with the S&P, Dow and Nasdaq all dropping into the red.

Oil prices were the big surprise, despite the fact that higher interest rates and a slowing economy affects oil demand and consumption. A closer look at the WTI price chart shows an initial hiccup that was subsequently overcome for a day’s range of $92.00 to $92.88.

Investors quickly weighed the impact of weaker growth in the U.S. against Saudi Arabia considering production cuts (also supported by several other OPEC members) earlier in the week and China’s growth engine possibly recovering. Since Saudi Arabia is willing to maintain pricing at the cost of production cuts in the event that Iran’s nuclear deal with the U.S. is done, it stands to reason that pricing will be maintained at these historical highs. Even if the US economy hits a pause. In any case, production hasn’t been easy of late with militants continuing to disrupt activity in Libya, as well as certain issues in Kazakhstan.  

As a result, the Energy sector, which has outperformed all others this year, continues on that path. Three oil stocks that have seen notable increase in their earnings estimates over the last 30 days are:

Exxon Mobil (XOM - Free Report) : The Zacks Rank #1 (Strong Buy) stock with Value, Growth and Momentum Scores of B, A and B, respectively, is seeing a lot of love from analysts. Its 2022 estimate is up 70 cents (5.8%) while the 2023 estimate is up 24 cents (2.4%).

Marathon Petroleum (MPC - Free Report) : The Zacks Rank #2 (Buy) stock has Value, Growth and Momentum Scores of A, A and C, respectively. Its 2022 estimate is up $1.72 (9.1%) and 2023 estimate up 51 cents (4.3%).

Chevron (CVX - Free Report) : Zacks Rank #3 ranked Chevron scores a B for Value but A for both Growth and Momentum. Its 2022 estimate is up 28 cents (1.6%) while the 2023 estimate is up 82 cents (5.0%).

Year-to-Date Price Performance

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