It’s a gusher! At least, it is in the energy sector. Finally, after years of struggling following the oil price crash, oil has regained its footing and has broken out. I believe oil prices are headed higher in 2018 and there are ways to profit no matter what kind of investor you may be.
The Liberty Portfolio, my stock and options advisory newsletter, mentions energy as being a central part of human experience, so it will always move higher over time
Oil is literally wrapped into the global DNA. Nothing happens without it. It makes anything that must move, move. It must be transported, which itself requires oil. Look around your house and you’ll find dozens of products that have been manufactured from fossil fuels. After decades, solar power still only accounts for less than 1% of total electricity generation in the US. That’s not going to change.
WTI Crude Oil is, at the time of this writing, priced at $62.74 a barrel. Brent Crude is at $68.54. These are three-year highs — highs that were on their way lower at the time. Now that oil has clearly broken out, it may trade sideways or even down a bit, but I believe it will continue to move higher in the future. Here’s how to trade or invest in this new move.
How to Profit From Increasing Oil Prices
The most conservative play is to purchase the big oil explorers/producers. There is no such thing as “peak oil,” so put that out of your mind. As mentioned, oil is a critical element for human life, and life does not go on without it (did you see Mad Max?).
Thus, the massive legacy producers and explorers will always be around, always be operating, and always do well over the long term. They are in great shape financially — and so are their stocks. In truth, I think you can choose any of them. Among those I would suggest is ExxonMobil Corporation (NYSE:XOM), which has been lagging behind its peers in the price recovery, and BP plc (ADR) (NYSE:BP), which I purchased last year at $32 and suggested you do the same. It is up more than 30% since then and has even higher prices ahead.
Or you can just buy the Energy Select Sector SPDR ETF (NYSEARCA:XLE), a basket of all the biggest energy plays. It’s still 25% off its all-time high.
A More Aggressive Approach to Oil Prices
If you are feeling more aggressive, which I have been, then you can buy oil itself. Now, there are many choices here, and you must remember that oil prices are volatile. So if you are going to go in this direction, I suggest placing a 7-12% stop-loss on your trade.
I think United States Oil (NYSEARCA:USO) is the simplest choice. There are many different kinds of oil and USO tracks the daily price of light, sweet crude. In November, the USO’s 50-day moving average finally crossed over the 200-day moving average — a very bullish sign. That happened at about $11 per share, and today USO is at $12.58, a 14% increase.
A riskier play is the iPath S&P GSCI Crude Oil Total Return Index ETN (NYSEARCA:OIL), which tracks West Texas Intermediate Crude. It’s riskier because it allocates its future contracts towards dates that are pretty far out, which can lead to deviations from the underlying price.
I own a very risky play — the ProShares UltraPro 3x Crude Oil ETF (NYSEARCA:OILU). This is a leveraged play that follows WTI futures.
Finally, you could choose an option that is down the middle by purchasing a security involving oil service companies — companies involved in oil movement, storage and infrastructure. Again, I love oil services because, while oil is essential, it can’t do anything unless it moves.
There is less volatility investing in oil services than buying oil itself, but a bit more than if you buy the legacy explorers. Your best choices here, I think, are VanEck Vectors Oil Services ETF (NYSEARCA:OIH). If you prefer the one best company in oil services, you can’t do better than the legendary Schlumberger Limited (NYSE:SLB). It has tons of cash and generates a lot of cash flow each year.
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 OILU. He has 23 years’ experience in the stock market, and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
