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Why oil is going higher: Strategist

Energy companies have largely been left out of the stock market party this year, despite a rally in oil prices.

Energy stocks in the S&P 500 have shed 15% over the past 12 months amid fears of oversupply and worries about slowing demand in a weakening global economy.

“Energy companies have underperformed for a while. I tend to like that because I think we can see a little bit of a catch-up,” Peter Tchir, head of macro strategy at Academy Securities, tells Yahoo Finance’s “The First Trade.”

Declines in shares of oil giants Exxon Mobil (XOM) and Chevron (CVX) weighed on the energy sector this week, despite a 3% rally in oil prices.

WTI crude (CL=F) came within a whisper of $60 a barrel Wednesday after a massive drop in crude supplies.

The Energy Information Administration said Wednesday that U.S. crude inventories fell by 12.8 million barrels last week. That’s the largest drawdown in nearly three years, when inventories fell 14.5 million barrels.

“If you look at the technical aspect of crude oil, if it breaks above [$60 a barrel] it’s going to break out of what’s called a symmetrical triangle pattern, and that’s very bullish for the commodity,” says Matt Maley, chief market strategist at Miller Tabak.

Underestimating the Iran risk

Oil also got a boost after President Trump signed an executive order Monday imposing new sanctions on Iran in response to the downing of a U.S. drone last week.

President Donald Trump holds up a signed executive order to increase sanctions on Iran, in the Oval Office of the White House, Monday, June 24, 2019, in Washington. Trump is accompanied by Treasury Secretary Steve Mnuchin, left, and Vice President Mike Pence. (AP Photo/Alex Brandon)

“The market has underestimated the risk of escalation – either purposeful or accidental – with Iran,” says Tchir.

“The U.S. has to consolidate around Iran and get the rest of the world backing us to stop their nuclear proliferation risk,” he says. “This is all tying together nicely for us to get allies out of G20.”

How high can it go?

Tchir is positive on energy stocks and believes oil prices will go higher. “Brent’s (BZ=F) going to lead the way, WTI will follow,” says Tchir, who believes WTI crude has the potential to reach $70 a barrel, in the near term.

Shares of ConocoPhillips (COP) shot up 5.2% Wednesday after a bullish call from Mizuho, though it gave back some of those gains Thursday. Analyst Paul Sankey raised his rating on the oil and natural gas exploration company from a “neutral” to “buy” and has an $80 price target on the stock.

“Conoco is bumping up against the top end of a descending triangle pattern,” says Maley, “and if it breaks above that, that’s very positive.”

In this Oct. 18, 2007 file photo, a sign tower reaches toward the sky at the entrance to Schlumberger's Sugar Land, Texas campus. (AP Photo/Pat Sullivan, file)

The oil services company Schlumberger (SLB) has dramatically underperformed the market. In the last five years, the stock has plunged 68%, while the S&P 500 has rallied 50%.

“Schlumberger made a nice little double bottom recently on a technical basis,” says Maley. “It’s been a dog for a long time. If it can finally rally, that’s going to give the group momentum and investors a lot more confidence in the group, as well.”

Alexis Christoforous is co-anchor of Yahoo Finance’s “The First Trade.” Follow her on Twitter @AlexisTVNews.

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