Yesterday afternoon, I refreshed one of my technical scans and it almost screamed at me… Don’t miss this trade!
The trade is in the oil sector, but maybe not where you’d expect.
Crude oil is now heading for $100 – and then some – as everything from increased demand to Middle East tensions are adding to its premium.
The trend can be seen easily in the United States Oil Fund (USO), which invests in oil futures contracts to mimic the moves in oil.
We’ve seen an acceleration in the trend as a result of the reasons I hit above, and USO shares are getting ready to break above their October 2023 highs.
That move alone will get the crowd moving towards investing in the trend.
That’s your first way to trade the trend in oil: Buy the United States Oil Fund (USO) at its current prices with a three-to-six-month target price of $100… a near 25% gain.
But there’s another consideration for the “oil trade” that I like. The services angle.
A lot of investors will go for the large energy companies to add to their energy portfolios, but I like to look a little deeper.
Think about where the drills go into the ground. That’s where the opportunities usually lie for some higher gains.
You see, the energy sector reacts to increased demand and higher prices by firing up more wells. We’ve all heard about how the United States can turn on “inventory” to meet demand, and they’re right.
But itis not Exxon (XOM) that’s turning things on, it’s the energy “service” companies.
Companies like Baker-Hughes (BKR), Schlumberger (SLB) and Halliburton (HAL) are the ones rolling the trucks and turning on the rigs to increase that demand. I usually refer to them as the “pointy end of the stick” when it comes to a rally in crude oil, and for good reason.
The oil services sector typically outperforms a bull market in crude oil by 20-30%.
And like crude oil, the sector is well represented by buying a single exchange-traded fund (ETF), the SPDR S&P Oil & Gas Equipment & Service Fund (XES).
Year to date, XES shares are trading up 15% compared to crude oil’s return of 22%, but that’s about to change as the price of oil begins to make increased inventory more profitable for the large energy companies.
Oil service companies and the XES shares are already starting to break above their October highs, which should begin a technical “slingshot” move higher.
That bullish volatility – yes, volatility can be bullish, not just bearish – suggests that we’ll see anywhere from 30-40% gains from the SEX shares over the same three-to-six month time period we talked about for the crude oil trade above.
Bottom Line
While more volatile and faster-moving, the energy services sector historically provides an investment that leverages the moves in crude oil prices.
I consider both the USO and XES shares a great way to trade the bullish trend in crude oil that should accelerate their bullish trend over the next six months.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.