The Best Way to Play the Oil Sector Right Now

We're seeing a great bounce today for oil and energy stocks after several OPEC+ members on Sunday announced intentions to voluntarily cut a further combined 1.16 million barrels per day of production.

That effectively puts a floor under the oil trade and sets the stage for higher oil prices ahead, and it also means that oil is the ideal place right now for us to "flip the chart" and pick up quick profits.

In addition to the OPEC news, we're seeing a lot of short-covering in the oil sector, which is adding to today's jump. I think we could more short-covering over the next several sessions.

Normally, when you see an across-the-board bump up in an entire sector, we'd recommend a sector-wide ETF. But we have to be a bit careful here: the energy sector is complicated and has a lot of sub-sectors, not all of which are going to benefit from higher oil prices right off the bat. Mid-stream pipeline companies, refiners, and gas stations, for example, may all eventually benefit, but it'll take a while for those gains to make their way to that part of the industry.

Exploration companies, on the other hand, will benefit immediately because they're most directly tied into the supply chain. So that's where we want to narrow our focus.

Fortunately, I have the perfect instrument for us to trade here. It's the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). Because its portfolio is constrained to exploration companies, it'll see very fast gains from the floor OPEC's just created in the oil market.

Even with today's rally in energy stocks, I still we think we could see XOP trade back up to its 52-week high of $170.62, which is 28.75% higher than where XOP is currently trading.

With that said, I like targeting the XOP May 19, 2023 $138/$139 Call Spread for $0.40 or less. Plan on exiting the trade for a 100% profit.

Based on the current price, we only need XOP to gain 5.1% for this spread to be fully in-the-money (ITM).

As long as XOP closes above $139.00 on May 19, 2023, this trade will have easily delivered our 100% profit target.

We'll be exploring oil and the energy sector throughout the week, so keep an eye out for more opportunities.

The post The Best Way to Play the Oil Sector Right Now appeared first on Total Wealth.

About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

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