The resurgence in crude oil is part of a saga that began with the onset of the Great Recession, but it took on an intriguing twist when Saudi Arabia launched a war on America’s fracking miracle. Fast forward three years and it’s clear that American frackers won a Pyrrhic victory.

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In late 2014, crude was changing hands around $106 a barrel. There were 1,609 oil rigs in the United States, Saudi Arabia was flushed with billions and American fracking stocks were unstoppable. But then it all changed, and as things improve the biggest threat is whether the lessons learned are remembered.

While the supply-demand dynamic of oil has a lot of mitigating factors, ultimately there has to be strong demand and evidence of weaker supply. In the United States, crude oil inventories have come down dramatically since February 2017 to the lowest level since the summer of 2015.

To keep the supply and demand in check, American producers are going to have to display discipline learned the hard way. Rebounding rig counts are holding around 742 and are well off the 1,609 we saw back in October 2014.

Meanwhile, Saudi Arabia is in the midst of a transfer of power, fighting an expensive proxy war and worried about its transition from an oil-based economy. The Middle Kingdom has had to go to the public debt markets and will soon sell shares in the national oil company. And all of a sudden, the nation’s debt-to-GDP ratio is beginning to surge — although it does still remain low in general.

When the Great Oil War began, Saudi Arabia was sitting on a record 279,641,000,000 Riyal (the country’s currency), but that has dwindled significantly. This might be why the new ruler arrested many of the country’s richest people, including several relatives, in attempts to fill their own government coffers.

What to Buy in the Oil Patch

Now that West Texas Intermediate (WTI) has cleared the major hurdle at $62, there isn’t a whole lot in the way of it rallying to $80. Perhaps that’s reaching, though, just like the calls in 2017 for crude to trade with a so-called two handle — meaning in the $20s per barrel.

Regardless, investors need to have exposure to this space right now, and there are three areas in particular that I am focusing more heavily on.

1. Quality names with strong cash flow. Companies like Exxon Mobile Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) fit the bill here. Both have gotten off to strong starts in 2018, climbing several percentage points and hitting new 52-week highs just this week. I’ve recommended CVX in my Smart Portfolio service for some time for both price appreciation and income, and it has done quite well for us. Even with the recent strength, I expect CVX and XOM to maintain their momentum as the oil market comes roaring back.
2. Companies that work in the Permian Basin and Eagle Ford, where extraction costs are low and there is a gold-rush-like atmosphere. Two names to consider: Concho Resources Inc (NYSE:CXO) and EOG Resources Inc (NYSE:EOG), which is also in one of my services. Both companies are growing exponentially and are expected to see triple-digit earnings growth in the current fiscal year and beyond.
3. Oversold stocks. These names have greater risk, but they could provide triple-digit returns for those of you willing to hold on through the choppiness. Chesapeake Energy Corporation (NYSE:CHK) is the name I’m watching here. It spent most of last year in a downtrend but looks to be bouncing off a bottom formed in mid-December. The shares recently reclaimed their 50-day moving average, and once the 200-day is back underneath it, the chart opens up nicely.

The bottom line is this: Crude oil is the ultimate global commodity, and it’s one of the hottest areas in the market right now that we must have exposure to. I think now may be time to hold on for the ride — an old-fashioned gusher.

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