On Tuesday, President Trump announced his decision to withdraw from the Iran nuclear deal, and reimpose sanctions imposed on the middle eastern country before the deal was struck in addition to potential new penalties.
This comes as Persian Gulf-related geopolitical risks have been rising, fueling double-digit gains in oil in 2018. The favorable supply-demand situation has also helped make oil one of the top-performing asset classes this year.
It appears the market is pricing-in the potential for supply disruptions if the U.S. doesn’t extend its waivers on Iran oil sanctions, as well as the possibility for proxy wars in the region. This geopolitical risk premium is also coinciding with OPEC’s likely decision to renew its production cuts.
Here’s how investors can take advantage of the trend in rising oil prices.
After Trump’s announcement this week, geopolitical tensions in the Middle East are likely to flare, especially between the U.S. and Iran. If OPEC extends its production cuts in June or Venezuela’s production falls much further, we could see tighter oil supply and even higher prices.
But investing in crude itself isn’t the best way to go right now. While oil prices have run ahead of energy stocks this year, the trend has begun to turn and energy stocks are a better option now.
One reason to like energy firms is their focus on capital discipline. Companies aren’t making massive investments in future production, unlike previous oil market rallies and are instead using their free cash flow for dividends and buybacks.
These energy companies in particular should be on your radar:
Royal Dutch Shell (NYSE: RDS.A)
No other major oil company has adjusted to the changing conditions in the oil market like Royal Dutch Shell has. And, after the company’s “year of transformation,” quarterly profits are up 140%, jumping form $4.8 billion in 2016 to $13.4 billion in 2017.
Higher oil prices are to thank for a big part of that jump in profits, but Shell is looking to the future as well. The company is in the process of shifting from oil to being predominantly focused on natural gas as the company believes natural gas demand will rise more quickly than oil demand.
BP (NYSE: BP)
Thanks to higher prices and a boost in output, BP saw profits double to $6.2 billion last year.
The company has struggled to shrug off the 2010 Deepwater Horizon disaster in the Gulf of Mexico, but 2017 saw a return to production levels the company hasn’t seen since the spill.
BP has a reliable dividend, and like Shell, is looking to explore new opportunities. The company is planning to invest $2 billion in India in the next few years as the country is one of the world’s biggest drivers of demand.
Concho Resources (NYSE: CXO)
If you’ve followed oil news in the last few years, you’ve heard about the U.S. Permian Basin.
In March, Concho inked a $9.5 billion deal to purchase RSP Permian which will make the combined company the biggest shale oil and natural gas producer in the oil-rich Permian Basin with 27 rigs and a reach of 640,000 acres.
The sticker shock of the deal sent the price of CXO down, but there’s no question that the reserves in the basin will continue to be a juicy target. And with Concho’s new massive acreage, the company will be at the center of everything, and that’s a very good place to be.
CononcoPhillips (NYSE: COP)
ConocoPhillips doesn’t need higher oil prices to thrive as it has spent the past few years repositioning its business so that it can prosper at $50 a barrel. With crude in the $70s or higher, COP stands to reap a massive windfall.
Shares in ConocoPhillips are already up 20% this year, but there could be much more upside considering the cash the company can generate at current prices, and even more if Trump’s sanctions send crude rising higher.