Volatility is striking the oil markets after attacks in Saudi Arabia forced the country to cut its oil output by 50%. Crude oil opened up 10% this morning — lighting a fire under the energy sector. Today we’ll look at three ways to invest in energy stocks. They should all benefit from continued uncertainty in the oil markets.
“An oil processing facility at Abqaiq and the nearby Khurais oil field was attacked on Saturday, knocking out 5.7 million barrels of daily crude production or 50% of the kingdom’s oil output,” Yun Li reported for CNBC.
On the heels of the news, Brent crude futures saw their largest intra-day rise on record, lifting 19.5%.
The energy sector has been one of the weakest performers this year, so higher oil prices could provide a much-needed boost to what has otherwise been a dismal showing.
Let’s look at three ways to invest in energy that should benefit from heightened anxiety in the Middle East.
Energy ETFs to Buy: United States Oil Fund (USO)
Source: ThinkorSwim
The most direct route available for speculating on crude oil is via the United States Oil Fund (NYSEARCA:USO). Because it owns oil futures, USO does a great job of tracking short-term movements in the energy markets. Up 13.6% since this morning, USO is back to the $13 range for the first time since November 2018.
Implied volatility is also spiking at the open to 49%, or the 60th percentile of its one-year range. The juicy premiums and USO’s low price tag make naked puts a compelling trade here.
If you think the risk remains to the upside for oil, then sell the Oct $12 puts for 40 cents. Consider it a bet that USO stays above $12. If it does, you’ll capture the 40 cent premium.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
Source: ThinkorSwim
If you’re not trading oil directly, then you’re looking for derivative plays. And that brings us to energy stocks. Rather than picking individual companies, you could play the entire space via a diversified exchange-traded fund like the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP). XOP holds a variety of energy companies involved in exploration and production. Like USO, its cheaper price tag makes XOP an excellent target for options selling.
This morning, XOP is jumping 11.3% to a two-month high. While much work remains before the longer-term downtrend reverses, I do like how the fund now sits above the 50-day and 20-day moving averages.
Implied volatility is booming this morning, reflecting a sharp increase in the premiums available for options sellers. If you’re willing to bet oil uncertainty keeps XOP aloft, then sell the Oct $23 puts for 50 cents.
Energy Stocks to Buy: Exxon Mobil (XOM)
The final route available to profit from the oil spike is to pick an individual energy stock. Exxon Mobil (NYSE:XOM) is the biggest in the space and offers a lower volatility avenue for speculation. Just look at today’s movement for proof. While USO is up 13.6% and XOP is up 11.3%, XOM stock is only rising 2.2%.
Exxon offers a lower beta path for traders. This morning’s jump carried XOM directly into overhead resistance at the 200-day moving average. And thus far, the ceiling is holding firm. The stock is dropping slightly as I type and now below it’s day high of $75.18.
While some backing and filling may be needed to digest this morning’s move, the downside should be limited as long as uncertainty keeps oil prices higher.
If you think XOM stock still sits above $72.50 in a month, then sell the Oct $72.50/$67.50 bull put spread for 80 cents.
As of this writing, Tyler Craig didn’t hold a position in any of the aforementioned securities. Check out his recently released Bear Market Survival Guide to learn how to defend your portfolio against market volatility.
