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End of Iranian Oil Waivers: Winners & Losers

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A year ago, the White House built pressure on Iran by bringing back a slew of tough economic sanctions against the Islamic state. Oil prices, in turn, edged up on worries of reduced supply from Iran, which was then the world’s fifth largest producer of crude. Saudi Arabia had responded by taking outlays to an all-time high.

Nonetheless, the Trump administration feared that such tough sanctions would hamper the global economy and had thus granted waivers to importers of Iranian oil, including China, India and six other nations. But, this came with the condition that these nations will eventually reduce such purchases and stop imports altogether.

However, most of the countries haven’t stopped importing Iranian oil yet. This has compelled the United States to decide not to reissue the waivers when they expire on May 2. U.S. Secretary of State Mike Pompeo recently said that the “U.S. will not issue any exception to Iranian oil importers.” White House Press Secretary Sarah Sanders added that “this decision is intended to bring Iran’s oil exports to zero.”

Here is a rundown on the full sanctions’ biggest winners and losers —

Oil Spurts Above $65, Energy Shares Gain

With the United States announcing that it will end import waivers, oil prices raced northward again. After all, barring import of Iranian energy has disrupted global oil production at a time when the crude market is tight.

Supply concerns, by the way, are already mounting after Venezuela’s oil shipments were completely wiped out by U.S. sanctions. Saudi Arabia has already curbed output, with supplies from OPEC falling by half a million barrels a day to a four-year low last month. Libya is also close to a full-fledged civil war, which will now put output and exports at risk. Meanwhile, rising optimism regarding U.S.-China trade negotiations is likely to boost global growth. And more growth means more oil consumption.

The U.S. oil price benchmark, West Texas Intermediate, peaked almost 3% on Apr 22 to $65.70 a barrel. That represented a surge of 54% from $42.53 a barrel on Christmas Eve. The Dow Jones Market Data further added that the U.S. oil price benchmark had gained in the last seven weeks, the longest winning streak since the seven-week rise ended Feb 28, 2014. Brent crude, the global benchmark, also rose nearly 3% to settle at $74 for the first time since last November. Brent gained 0.6% last week, highlighting its fourth successive weekly rise.

Shares of energy companies scaled north backed by surging crude oil prices. The SPDR Energy Select Sector ETF rose 0.8%, with 27 of its 30 components gaining ground. Meanwhile, the S&P GSCI Crude Oil index has soared 30.7% so far this year, while the broader S&P 500 has gained 13.6%.

 

So, how to play the oil’s upward journey? Companies that are involved in hydraulic fracturing are poised to gain significantly. This is because a drop in oil price hurts their cost structure, killing the motive to pump.  PDC Energy, Inc. (PDCE - Free Report) is one such company. Shares of this independent exploration and production company has rallied 56.8% on a year-to-date basis, easily outpacing the Oil and Gas - Exploration and Production - United States industry’s rise of 19%.

 

In the past 60 days, the company has seen 11 earnings estimates move north, while one moved south for the current year. The Zacks Consensus Estimate for earnings rose 42.6% in the same period. PDC Energy currently flaunts a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Another exploration and production firm Anadarko Petroleum Corporation (APC - Free Report) also saw its shares gain 46.1% so far this year, easily outperforming the Oil and Gas - Exploration and Production - United States industry’s rise of 19%.

 

In the past 60 days, the company has seen eight earnings estimates move north, while two moved south for the current year. The Zacks Consensus Estimate for earnings rose 39.4% in the same period. Anadarko Petroleum possesses a Zacks Rank #2.

Gold Edges Up on Safe-Haven Demand

Gold prices went up on Washington’s move to choke up Iran’s oil revenues. This is because 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.

Given this bullishness, one should consider gold mining company AngloGold Ashanti Limited (AU - Free Report) and explorer and developer of gold mineral properties NovaGold Resources Inc. (NG - Free Report) . While AngloGold Ashanti currently has a Zacks Rank #2, NovaGold boasts a Zacks Rank #1. At the same time, these companies have given steady returns so far this year.

 

Aviation, Refiners to Take a Hit

Aviation stocks traditionally have an inverse relationship with oil price movement. So, it isn’t surprising that shares of aviation firms fall after a sharp rise in crude oil prices. After all, fuel costs are major part of the operating costs of aviation firms; thus rise in oil prices will hit profit margins.

Refineries also stand to lose from higher crude oil prices as crude is their raw material. So, refineries’ net cash flow declines when crude oil prices pick up.

U.S. Global Jets ETF, which is composed of the exchange-listed common stock (or depository receipts) of U.S. and international passenger airlines along with VanEck Vectors Oil Refiners ETF, dropped 1.3% and 0.2%, respectively, on Apr 22.

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