Oil Prices Rise Ahead of Likely Fed Rate Cut: 5 Top Picks

Oil prices have been weighed down of late by the two-pronged effect of clear signs of a supply glut and the trade war apprehensions that is denting demand for oil and other commodities. However, oil prices ended in the green in the last four trading sessions on optimism that the Fed will cut rates for the first time since the financial crisis this week. In fact, in the last trading session the West Texas Intermediate (WTI) crude went up 1.2% to $56.87 a barrel. And when it comes to Brent crude, the global oil benchmark rose 0.4% to settle at $63.71 a barrel.

No doubt, a rate cut will propel economic expansionary activities and fuel demand for oil in the United States, which is the world’s biggest oil consumer. Fed officials are expected to begin their two-day meeting on Jul 30, and are widely expected to proceed with an interest rate cut by a quarter point.

In fact, Fed Chair Jerome Powell has dropped enough hints regarding a potential rate cut this month, and this is primarily because of two major issues. First, as Powell categorically puts it, trade-related matters remain unresolved, and second, concerns about global economic growth continue to weigh on corporate earnings.

Powell’s statement to the House lawmakers comes at a time when President Trump is relentlessly building pressure on the Fed to cut interest rates to bolster the U.S. economy. In fact, Trump recently tweeted that he wants to appoint Judy Shelton and Christopher Waller for the Federal Reserve board. Both of them are known proponents of lower interest rates. They believe that lower interest rates and a loose monetary policy will help the economy expand in the near term.

Talking about economic expansion, better-than-expected GDP growth in the second quarter, further strengthened the outlook for oil demand. According to the Bureau of Economic Analysis (BEA), the real or in other words inflation-adjusted GDP expanded at an annualized rate of 2.1%, which surpassed expectations of a 1.9% reading.

GDP was able to exceed consensus expectations, predominantly on account of robust consumer spending, which grew at an annualized rate of 4.3% in the second quarter, adjusted for inflation, and outpaced expectations. In fact, consumer outlay in the said quarter registered the fastest growth rate since fourth-quarter 2017 and also the fifth fastest since first-quarter 2006.

How to Play Oil’s Northward Journey?

It’s quite obvious, from bigwig oil producers to rig operators to pipeline owners to refiners; all are likely to witness a rally in their share prices as oil prices scale upwards. Energy shares have been one of the poorest performers so far this year, however, now this uptick in oil prices will surely lure investors back.

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. Thus, with oil prices moving north, shares of gold mining companies are also poised to gain traction.

5 Top 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).

Holly Energy Partners, L.P. HEP 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 estimated rally of 3.9%.

Magellan Midstream Partners, L.P. MMP engages in the transportation, storage, and distribution of refined petroleum products and crude oil in the United States. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 0.2% over the past 60 days. The company, which is part of the Oil and Gas - Production Pipeline - MLB industry is expected to post an earnings growth of 5.6% for the next year.

AngloGold Ashanti Limited AU 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 10.9% 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 estimated rally of 10.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Royal Gold, Inc. RGLD acquires and manages precious metal streams, royalties, and related interests. The stock currently sports a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has moved 4.6% 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 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 66.7% in the past 60 days. The company’s expected earnings growth rate for the current year is 100% compared with the Mining - Gold industry’s projected rally of 10.8%.

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Magellan Midstream Partners, L.P. (MMP) : Free Stock Analysis Report
 
Kinross Gold Corporation (KGC) : Free Stock Analysis Report
 
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Holly Energy Partners, L.P. (HEP) : Free Stock Analysis Report
 
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