The price of oil has created many problems in the energy sector, and in other related sectors. Ever since the price collapse in 2015, energy stocks of all stripes have struggled. The big producers and explorers have not returned to their old highs. Oil services stocks have bounced around, because the collapse choked off revenue since it wasn’t profitable enough for clients. Fracking and shale companies were the hardest hit, and many of them had expensive debt that couldn’t be paid.
The commodity’s prices have stabilized recently, and on Monday, they broke out through some key technical levels. This breakout may or may not hold – the last few haven’t – but regardless, it’s still a great time to consider buying or adding to your energy positions.
Here are a few different ways to play the possible oil price breakout.
Buy Oil
The most direct way to handle a trade is to actually buy oil directly. There are many vehicles under which this is possible, but beware. Oil is extremely volatile, so you must have stop loss orders in place.
The simplest and most straightforward play is to buy United States Oil (NYSEARCA:USO), which is meant to reflect daily price changes in light sweet crude. The reason for this particular purchase is that the fund closed at $10.55 on Monday. That is just above the 200 day moving average as well as the 50 week moving average.
I would purchase USO here and scale out of a third of it at around $11.75 to $12, and hold the rest. I would also set a stop loss about 7% below your purchase price, or around $9.85.
If you are feeling very aggressive, you could purchase one of the 3x leveraged oil ETFs, such as VelocityShares 3x Long Crude Oil ETN (NYSEARCA:UWT), which closed at $17.16 on Monday.
Buy The Blue Chips
I believe that every investor should have some exposure to energy in their long-term diversified portfolio. Energy is part of every facet of human life, and will continue to be for hundreds of years. I don’t buy into this nonsense about “peak oil,” and alternatives presently account for less than 1% of energy creation globally.
It is not only a necessary factor in business and personal life, it is absolutely essential. Consequently, the big explorers and producers will always be in demand. They are also the most financially sound companies and stocks. You really can’t go wrong with any of them. My personal choice might be to go with ExxonMobil Corporation (NYSE:XOM) as I think it is the best positioned for the long term.
However, value investors may want to think about buying BP plc (NYSE:BP), which just broke out to a three-year high and appears to be on a sustained upward trajectory.
Buy Services
Another way to go is to split the difference, and buy an ETF or individual company that handles energy in some way. Oil services include movement, storage, and infrastructure to support energy. Consequently, you have many different ways to invest alongside oil. I like oil services because they are an essential part of the entire sector.
There is more volatility with oil services than with the big producers, because they are effectively a derivative play on oil. The good news is that the sustained pressure on oil prices means that the surviving plays in oil services have shown resilience and have strong enough balance sheets to hold on.
VanEck Vectors Oil Services ETF (NYSERCA:OIH) is about 50% off its 2014 high and only 15% off its recent lows. If you are looking for an individual play, the safest bet is the great company Schlumberger Limited (NYSE:SLB) which, although struggling in recent years, still has gobs of free cash flow and over $10 billion of cash on hand.
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 owns BP and UWT. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
