Iranian oil sanctions lead to a pop of nearly 3% in WTI. Stay long in oil stocks
Oil prices surged as high as 2.9% yesterday, hitting $65.87 — the highest level since October 31. As I write Tuesday morning, they’re up again, with WTI crude reaching as high as $66.19. Prices have rallied 41% so far in 2019.
Behind yesterday’s spike was the White House’s announcement that waivers for Iranian oil sanctions will be completely ending.
For readers who aren’t aware, a year ago, President Trump ended a 2015 nuclear deal with Iran. As part of that, he also announced tough sanctions that prohibited any and all countries from importing oil from Iran.
This past November, Trump softened his position by granting a handful of countries a 180-day waiver, enabling them to continue buying Iranian oil. Those 180 days are up on May 2nd, and the news yesterday was that the waivers wouldn’t be renewed, meaning the goal is for Iranian exports to end completely.
From Reuters:
“We are going to zero. We’re going to zero across the board,” (Secretary of State) Pompeo said, adding that the United States had no plans for a grace period beyond May 1 for countries to comply. He said the aim is to deprive Iran of its lifeline of $50 billion in annual oil revenues
Pulling Iranian oil from the market puts an additional squeeze on supply that’s already tight due to U.S. sanctions on Venezuela, as well as voluntary cuts from OPEC.
***We first put this oil trade on your radar back in February
In our February 4th Digest, we noted how two of our analysts were bullish on oil. First, there was Louis Navellier. Louis is our resident growth investing expert. Here’s what he wrote to subscribers in his February issue of Growth Investor:
One area that I’m particularly interested in is domestic energy companies. For the next several quarters, the best earnings results will be from energy-related stocks, especially considering the energy boom happening here in the U.S.
The U.S. is now producing 11.8 million barrels of crude oil per day. That’s more than Russia and Saudi Arabia. And it’s not showing any signs of slowing down: U.S. crude oil production is expected to expand by another 1.1 million barrels per day in 2019. So, by the end of the year, domestic crude oil production could be near 13 million barrels per day.
Then, there was Neil George. Neil focuses on income investments through his Profitable Investing newsletter. From Neil’s February issue:
Supply and demand on a global scale is still favoring pricing for crude to have some support near current prices. In addition, U.S. production thanks to technological developments, has hit new highs again.
***The trade we suggested you consider in February was XLE
XLE is the SPDR Energy Select Sector ETF. It’s one of the largest and most liquid energy ETFs in the world.
As you can see in the chart above, XLE has been climbing since our recommendation. If you’d entered the trade on February 4, you’d be up over 5%. Plus, you’d have collected XLE’s $0.514 dividend in March. That roughly equates to a 3% yield.
***Then, in our March 29th Digest, we focused on a different investment, a specific MLP that Neil likes
From that issue:
Even though a broad ETF is a good way to play this sector, there’s one specific company that Neil believes is in a great position to benefit from the additional U.S. oil production — Viper Energy.
From Neil:
Viper Energy is the leading landlord of the petroleum patch, primarily in the Permian Basin. This is the current epicenter of shale oil development in the U.S.
As a landlord, the company doesn’t drill or operate a single well. Instead, it leases out its land for exploration and production (E&P) companies for fee income and royalties on the oil and gas that gets pumped out of its land.
This means little capital is needed beyond the land and that the company doesn’t have to worry as much about the price fluctuations in oil and gas for its operations. But, of course, the higher the price of crude and natural gas, the higher the royalties it takes in and the higher the income it delivers to investors.
Viper jumped on the news yesterday, popping over 4%.
In addition, Viper should be paying another dividend around the middle of next month. The dividend yield is nearly 6% as I write, so investors are getting paid handsomely while playing the surge in oil prices.
If you’re in either trade, our advice for now is to stay long. Though market conditions can change quickly, at the moment, oil prices continue to enjoy tailwinds.
*** Neil’s picks are on a roll as a different stock in his portfolio just hit a 52-week high
Neil’s oil stocks aren’t the only ones in his portfolio that are climbing. Yesterday, his recommendation, Microsoft, hit a new 52-week high. And as I write it’s up nearly another 1% (Tuesday morning).
Since its early days focusing on software, the tech giant is now pushing ever-deeper into “the cloud.” Plus, it continues to move its business model toward recurring revenues.
From Neil:
Most importantly, Microsoft is a leader in the move I’ve been tracking by technology companies to move their focus away from unit sales and towards recurring income.
One of the best sources for Microsoft is its Azure cloud computing unit. The innovation there isn’t just about taking a piece of the expanding cloud market, but also offering new adaptations of its cloud offerings that make its services more competitive for specific industries.
So, how is this playing out in Microsoft’s numbers?
Shares are up nearly 28% over the past year, compared to just 7% from the S&P. Microsoft’s earnings last quarter were solid — up 12%, which came in just higher than consensus estimates. The company reports earnings tomorrow after the market closes.
Neil recommended Microsoft all the way back in 2012, so he’s sitting on a whopping gain of over 430%. His “buy below” price is $119, so at Microsoft’s current price of nearly $124, look for a pullback before considering initiating a new position.
Congrats to Neil for another great pick. If you’d like to read more from him on Viper, Microsoft, or any of his other income-focused plays, click here.
In the meantime, we’ll continue to keep you updated on oil prices here in the Digest.
Have a good evening,
Jeff Remsburg
