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Iran Deal Exit Pushes Energy Stocks Higher


President Donald Trump’s withdrawal from the Iran nuclear agreement seems to have broken some uncertainty in the markets. The Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite are all rising today, as is crude oil.

Brent, the benchmark for Europe, has risen 2.6% to around $77, and West Texas Intermediate, the benchmark for North America, has climbed about the same to around $71. Higher oil prices have also given energy stocks a boost.

The Energy Select Sector SPDR exchange-traded fund (XLE) has risen about 2.7%, and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has spiked more than 3%.

Crude-oil fundamentals continue to improve, but investors shouldn’t get ahead of themselves. While Trump’s hawkish rhetoric suggests strict sanctions, details of the exit have not been disclosed—and the Trump White House has a history of making strident statements to only give ground during the implementation stages, noted Mark Haefele, global chief investment officer at UBS.

The U.S. looks like it is standing alone. France, Germany, and the United Kingdom in a joint statement expressed "regret and concern" about the U.S. exit, and the European Union said it would honor the Iran nuclear accord. Iran state TV announced it would remain in the deal and have talks with European nations, China, and Russia.

"The support of the other signatories for the Iran deal could suggest that the impact on Iranian production may be more limited than implied by the U.S. secondary sanctions," wrote Goldman Sachs‘ Damien Courvalin in a report published Wednesday. That means there might be fewer barrels rolling off the market than the one-million-per-day decline Iran saw in the 2012-15 period, when there was more of a united front.

RBC Capital Markets‘ Michael Tran pointed out yesterday that the U.S. isn’t in any position to tell China to curb Iranian crude oil imports. Last year, China was the top buyer, followed by India, South Korea, and Turkey—countries that might not adhere to U.S. sanctions.

Strategists say the outlook for oil and energy stocks looks bright. In addition to the Iran situation, falling production in key exporters Saudi Arabia and Venezuela could also put upward pressure on oil prices.

Energy investors should stay positive on oil and the exploration-and-production companies, wrote William Featherston, a Credit Suisse analyst in a note published after Trump’s address on Tuesday. "Our supply/demand balances imply a bullish outlook for crude even if Iranian production/exports are unaffected. And we continue to believe the backward-dated futures curve materially undervalues long-term oil prices," he wrote.

Even if the U.S.’s exit has no impact on Iranian exports, Featherston sees a "tight" market. E&Ps are assuming about a $52 per-barrel price, which appears conservative. His top E&P picks include Marathon Oil (MRO), Anadarko Petroleum (APC), and Noble Energy (NBL).

UBS’ Haefele thinks stock markets can handle higher oil prices. "A boost to oil firms, which account for 7% of the MSCI All Country Index, should help offset the downside for other companies from higher input costs and the negative effects on consumer disposable incomes from higher fuel bills," he wrote.

Balancing out the optimism is Gavekal Research‘s Anatole Kaletsky. "It is not clear that the U.S. confrontation with Iran will move the politics of oil pricing in a bullish or bearish direction. This is because Trump and his Saudi allies have strong incentives to prevent oil prices from rising further," he wrote in a note published Wednesday morning.

Kaletsky, who has been bearish on crude since late 2014, argues that prices are now more likely to dip. Crude hovering at $70 per barrel will "constrain economic activity and therefore energy demand especially emerging economies," he said.

A different take: "Despite the recent surge and anticipating more to come, oil prices are not yet a real risk. History says that only comes when crude prices double in a year or less," wrote Nicholas Colas, co-founder of DataTrek Research.

If crude jumps to $84 per barrel next month, Colas said, that would be cause for concern.

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