How To Best Profit From Oil’s Latest Bounce (XLE)
From Sean Brodrick: Oil prices are on a tremendous run. Naturally, like clockwork, you can hear the bears line up to grumble … about a potentially steep tumble. I say, “Back off bears. Even though winter looms, it’s time for you to go back into hibernation!”
Why? Because oil prices are cycling higher. And they are fueling a potentially lucrative trend in a group of energy stocks.
We may get a short-term pullback in oil prices, but there is plenty of fuel for a bigger run in oil – and fast-lane profits for select U.S. companies.
My bullish view flies in the face of some industry estimates. Let me show you why the so-called “experts” who predict too much supply and lower prices are full of hot air.
First, an important fact: Oil prices are at their highest in more than two years.
You can see the U.S. crude oil benchmark tested the high from early this year and blasted through it. BOOM!
This shows that momentum is on the bulls’ side. Dips are being bought. This kind of breakout gives us a price target of $65 per barrel!
Why is oil breaking out? I’ll give you four solid reasons …
Tensions in the Middle East are heating up. Saudi Arabia and Iran are moving closer to a shooting war. And Saudi Arabia is blockading neighboring Yemen as its troops try to stomp out Shiite rebels there.
Whispers are starting that the Organization of Petroleum Exporting Countries (OPEC) will extend output cuts beyond the end of March. OPEC is already exceeding its production cut targets. In September, the cartel hit 137% of its target. In October, it hit 105%. OPEC’s production dropped to a five-month low of 32.5 million barrels-per-day in October.
OPEC member Venezuela saw its oil output fall to the lowest level in 28 years. Venezuela produced only 1.86 million barrels per day in October. As a result, the country is on the brink of default. In fact, it’s even delaying payments on debts for the state oil company, PDVSA. This raises the specter that Venezuela’s oil industry will become non-functioning, or have assets seized.
Oil inventories in developed economies fell below 3 billion barrels in September for the first time in two years. Lower inventories are naturally bullish.
These are all bullish trends for oil prices? And if there really is a shooting war in the Middle East? If horrific weapons are used in the oil fields of Saudi Arabia? Well, that could send prices much, much higher!
Just to be clear: We don’t want anything bad to happen to Saudi Arabia. Anyway, that country should look to its laurels as the world’s Central Bank of Oil. Another country, an up-and-coming oil and gas producer, threatens to take the crown.
The good news is it’s a country you’re very familiar with.
Welcome to the New Saudi Arabia
By 2025, American oil production will grow by a whopping 8 million barrels-per-a day (bpd). That’s according to the latest estimate from the International Energy Agency (IEA). That kind of growth rate would beat Saudi Arabia’s oil production growth at its highest.
What’s more, the IEA says the rise in U.S. oil production will account for 80% of the increase in world oil production by 2025.
That’s stunning. And solid American oil companies will stand to make a fortune.
So how can you play it?
Well, you could buy the Energy Select Sector SPDR Fund (NYSE:XLE). It’s safe … and boring. But it should do well.
Or you could buy a fund that is leaving the XLE in the dust.
The PowerShares S&P SmallCap Energy Portfolio (NASDAQ:PSCE) is an ETF that, as the name implies, holds a basket of smaller energy stocks. And it is running rings around the XLE.
In the last three months, the XLE is up 8.6%. Not bad. At the same time, the PSCE is up 20.6%. Wow!
Sure, it’s more volatile. This is the kind of fund where you want to buy the dips.
But this is also a roller-coaster ride that could be a thrill ride. Very profitable indeed.
Do your due diligence before buying anything. But don’t ignore this megatrend in U.S. energy.
The Energy Select Sector SPDR ETF (XLE) rose $0.03 (+0.04%) in premarket trading Thursday. Year-to-date, XLE has declined -9.40%, versus a 15.78% rise in the benchmark S&P 500 index during the same period.
XLE currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #13 of 35 ETFs in the Energy Equities ETFs category.
This article is brought to you courtesy of The Edelson Institute.
