2016 has been brutal for many stocks. A several thousand-point plunge in the Dow Jones Industrials in January was followed by a brief rebound then another plunge to the lows. Over the last several weeks, the overall stock market has battled back but remains substantially below the highs of 2015.
However, there has been one financial sector that has been in a massive confirmed upward trend during this time frame. In fact, it’s up over 37% this month alone!
I am talking about oil prices.
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There is still time to jump on this trend for profits. We have identified 3 ways stock traders can ride this commodity higher. First, let’s take a look at the uptrend in oil.
The up-trend is being powered by the big money piling into the long side.
Bloomberg reports that hedge funds and other speculators ramped up their net-long position in West Texas Intermediate futures and options by 14 percent to the highest level since November in February.
“Talk of an output freeze scared a lot of the weaker shorts,” said John Kilduff, a partner at Again Capital LLC told Bloomberg, a New York-based hedge fund that focuses on energy. “There’s been a lot of talk and no action yet, but it’s had an impact. The fundamentals of the market haven’t changed.”
In oil bullish economic news, the Feb. 16 agreement executed in Doha signaled the first indication of collaboration between OPEC and non-members since oil prices started to plunge in 2014.
Saudi Arabia refuses to slash oil production as other countries would be unlikely to assist in restraining output, Petroleum Minister Ali Al-Naimi stated at the IHS CERAWeek conference in Houston last week, leaving the burden of adjusting supply with high-cost producers.
Adding to the bullishness, U.S. crude production dropped by 33,000 barrels a day to 9.1 million in mid-February , the lowest since October, according to the Energy Information Administration.
In addition, rigs targeting oil in U.S. fields declined to 400 , the lowest since December 2009, according to Baker Hughes Inc. .
Reuters reports that the liquidation of hedge fund short positions was associated with a big rise in WTI prices, from under $32 per barrel to almost $34.50.
Prices have continued rising strongly and are now over $36.50 per barrel, which strongly suggests liquidation of hedge fund short positions has continued since March 1.
The vast price increase is the third time since the beginning of 2015 that there has been a substantial short-covering rally as hedge funds pile into large short positions then dump them in WTI.
Some analysts believe that the price move in WTI can be traced to the closing of short positions but the record long in Brent positions suggests many hedge funds are now betting on a big rise in oil prices in the rest of 2016.
Fundamentally, signals of financial distress across much of the oil industry, hard data indicating production outside OPEC dropping, rumors regarding an arrangement among producers, and evidence of strong demand for gasoline, have all combined to paint a very bullish picture leading to hedge fund accumulation.
It’s important to remember that prior oil rallies in March-May and August-October 2015 failed with oil dropping back to the lows. However, the fundamental case for the upward trend to continue is solid right now.
Finally, a few super oil bulls are emerging. One example is CNBC reported that ValueAct Capital Management’s founder and CEO Jeffrey Ubben said, as many companies cut labor forces, keeping up drilling activity will become “very difficult.” The slowdown in production could drive crude to $100 by 2019, he said. “People say it’s maybe going to go to ($55 per barrel) and hang out there. No way,” Ubben told CNBC’s “Closing Bell.”
Many of you are probably thinking that you need a futures trading account to capture this surge in oil prices. This is simply not true. There are multiple stocks that will benefit from the oil price trend.
We have identified 3 oil-based stocks that have set up to be great investments for 2016.
- United States Oil Fund (NYSE:USO)
This is a “pure play” on oil prices. It describes itself as an exchange-traded security designed to track the daily price movements of West Texas Intermediate (“WTI”) light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE Arca.
The investment objective of USO is for the daily changes in percentage terms of its shares’ NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in price of USO’s Benchmark Oil Futures Contract, less USO’s expenses.
USO’s Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire. The crude oil contract is WTI light, sweet crude oil delivered to Cushing, Oklahoma.
USO invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less.
Despite the surge in oil prices, USO remains lower by over 10% this year creating a great opportunity for bargain hunting investors.
- Exxon Mobile (NYSE:XOM)
This giant oil company’s shares have pulled back from recent highs in the mid $84.00 zone to support in the $81.00 per share area. This has set up an ideal buy opportunity for oil trend following investors.
This $341 billion market cap, Texas based company is engaged in the exploration and production of crude oil and natural gas. The Company is involved in the manufacturing of petroleum products, and transportation and sale of crude oil, natural gas and petroleum products.
XOM also manufactures and markets petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and a variety of specialty products.
It’s projects include the Kearl project, Heidelberg project, the Point Thomson project, the Hadrian South project, the Lucius project, the Chirag Oil project, the Tapis Enhanced Oil Recovery project, the Damar project, and the Barzan project, among others. The Company is conducting its operations and projects in the United States, Asia, Africa, Canada/South America, Europe and Australia/Oceania.
What we like about Exxon Mobile is the fact that it holds a large portfolio of downstream refining businesses. Downstream assets are known to be able to withstand oil price declines. Therefore, XOM is well prepared to profit even if oil prices reverse.
- Southwestern Energy (NYSE:SWN)
This mid-stream energy company’s share price is higher by just under 5% for the year but remains lower yet remains down by more than 66% over the last 52 weeks.
Southwestern Energy Company describes itself as an energy company engaged in natural gas and oil exploration, development and production (E&P).
The Company is focused on creating and capturing additional value through its natural gas gathering and marketing businesses, which it refer to as Midstream Services. The Company conducts its business through subsidiaries.
Southwestern’s operations are focused within the United States on development of two natural gas reservoirs located in Arkansas and Pennsylvania. Its operations in Arkansas are focused on a natural gas reservoir, Fayetteville Shale, and its operations in northeast Pennsylvania are focused on the natural gas reservoir, Marcellus Shale. The Company engages in natural gas gathering activities in Arkansas, Texas, Louisiana, Pennsylvania and West Virginia.
Climbing energy prices will continue to lift the shares.