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Oil Prices Spike on Rising Gulf Tensions: Here's How to Profit

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Iran’s latest move to seize one U.K.-flagged and another Liberian-flagged tanker last week in the Strait of Hormuz pushed oil prices northward and stoked fears of rising tensions in the Middle East. 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. The West Texas Intermediate (WTI) crude went up 1.5% to $56.15 a barrel on Jul 19. And when it comes to Brent crude, the global oil benchmark rose 2.1% to settle at $63.23 a barrel.

Iran, initially, said that it captured the British-flagged vessel after it collided with a fishing boat. However, it is widely anticipated that such a move follows the British forces’ capture of an Iranian tanker off the coast of Gibraltar, alleged to have been transporting oil to Syria.

Meanwhile, Jeremy Hunt, British foreign secretary, has confirmed that the U.K. government is looking to release the vessels. Iranian news agencies, however, confirmed that the Liberian-flagged tanker was later released.

Such seizures add to tensions between Iran and the West, especially after the U.S. Navy brought down an Iranian drone that had come close to one of its ships. Trump’s national security adviser, John Bolton had said that the Iranian drone was shot down as it “posed a threat to the ship and its crew. It’s entirely the right thing to do.”

The United States has accused Iran of attacking tankers in the Gulf of Oman. Two tankers from Saudi Arabia, one vessel from Norway, and one from United Arab Emirates were damaged by sabotage attacks between the Persian Gulf and Gulf of Oman.

How to Play the Oil Rally?

From big oil producers, rig operators, pipeline owners to refiners, all witnessed a rally in shares, which resulted in a record high for the broader S&P 500. Energy shares in the S&P 500 index were collectively up 0.5%. Lest we forget, energy shares have been one of the weakest performers so far this year, but this growing turmoil in Middle East will surely lure investors back to energy players.

(Performance as on Jul 19, 2019 - www.sectorspdr.com)

As crude moves 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 poised to rise.

Top 5 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).

Approach Resources, Inc. (AREX - Free Report) 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 17%.

Holly Energy Partners, L.P. (HEP - Free Report) 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 2.2% 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 projected rally of 3.5%.

AngloGold Ashanti Limited (AU - Free Report) operates as a gold mining company. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 13.1% over the past 60 days. The company’s expected earnings growth rate for the current year is 111.3% compared with the Mining - Gold industry’s expected rise of 9.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Royal Gold, Inc. (RGLD - Free Report) acquires and manages precious metal streams, royalties, and related interests. The stock currently has a Zacks Rank #1. The Zacks Consensus Estimate for its next-quarter earnings has moved 12% north in the past 60 days. The company, which is part of the Mining - Gold industry, is expected to record earnings growth of 11.6% in the current quarter.

Kinross Gold Corporation (KGC - Free Report) engages in the acquisition, exploration and development of gold properties in the United States. The stock currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has climbed 28.6% in the past 60 days. The company’s expected earnings growth rate for the current year is 80% compared with the Mining - Gold industry’s projected rally of 9.8%.

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