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Energy Stocks Have Nowhere to Go but All the Way Up

Lawrence Meyers

We’ve seen a breakout in oil prices recently. Some of this is due to supply and demand issues, some to the ongoing tensions with Iran. A number of analysts believe that new sanctions could restrict Iran’s ability to sell oil to the West, which could reduce market supply by as much as 1 million barrels per day.

This is great news for energy stocks.

Less supply obviously means an increase in crude oil prices, in energy stocks and in oil stocks. Most of the different oils, from West Texas intermediate to Brent and so on, have broken out to multi-year highs.

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West Texas intermediate crude oil prices hit $71.24 per barrel, while Brent hit $77.21 per barrel, up more than 3%.

A Deeper Look at Energy Stocks

Crude oil prices crashed in 2015, which destroyed energy stocks. The gorillas of the energy stocks were able to survive. Oil services stocks were hit pretty hard, although that depended on the size and type of business. Shale and fracking stocks got nailed, thanks to high-priced debt and meager cash flow to service it.

Saudi Arabia wants crude oil prices at $80 per barrel. So here are some thoughts on how to play energy stocks going forward, both short-term and long-term.

The most aggressive approach is to trade crude oil prices directly. There are a few ETFs that permit this. The most basic is United States Oil (NYSEARCA:USO). This fund is linked to the daily price fluctuation in light sweet crude. USO actually broke out initially around $10.75. It’s now at $14.37, with resistance at $16, so there may be room for another 12% move.

Credit Suisse X-Links Crude Oil Shares Covered Call ETN (NYSEARCA:USOI) is the same play but there’s a built-in hedge. You get a position in USO “but with a notional short position in USO calls, expiring the next month with strike prices 6% out of the money.”

Thus, you get yield and decreasing volatility compared to owning USO outright, but at the cost of upside participation.

I actually own a very aggressive 3x leveraged position, giving me heightened exposure to the move in oil. I own the ProShares UltraPro 3x Crude Oil ETF (NYSEARCA:OILU).

Oil Prices on the Rise

Now, I do think that were looking at a longer-term sustained increase in oil prices. I suspect we will range between $60 per barrel and $80 per barrel for some time. Higher oil prices means more exploration and production. That also means that the big legacy E&P companies will require oil storage, movement, and infrastructure.

When we look at oil services stocks, then, we would expect to see near-term stock price increases. We should also expect to see medium to longer-term increases in oil services companies

Still, oil services represent a derivative investment. The top oil services companies have strong balance sheets that will only get stronger during this period, though.

The VanEck Vectors Oil Services ETF (NYSERCA:OIH) peaked at $53 back in 2014 and is now at $28.20. There’s lots of upside still here.

For the very long term, any of the big legacy E&P companies are a strong choice for energy stocks. My two plays in this sector are both on the inexpensive side, and therefore think have more upside.

Exxon Mobil Corporation (NYSE:XOM) is trading at about $80. It bounced off its $72 multi-year low recently. I, along with many other investors, are certainly disappointed that Rex Tillerson did not stay in his job as Secretary of State.

My belief was that, considering his position as the former CEO of Exxon Mobil, that a deal to lift sanctions against Russia would happen. That way, Exxon Mobil could finally begin its joint venture with Rosneft. Instead, we got the Russian collusion nonsense and that derailed everything.

I have also been long BP plc (NYSE:BP) since it hit $28 per share. It is finally put Deepwater Horizon behind it, and it’s on its way to recovery its former glory.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

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