As I write this, crude oil prices in both New York (WTI) and London (Brent) are approaching levels not seen since late November 2014.
More importantly, the upward trajectory has remained constant. And the primary reason for this improved outlook has been the dramatic shift in pricing volatility.
Putting the current situation in perspective, WTI is up 5.8% for the month, while Brent is better by 8.4%. That means WTI has now improved a hefty 260% since its closing low of $26.21 a barrel on February 11, 2016.
Brent has fared even better, up 267% since its equivalent closing low of $27.87 on January 20, 2016.
Now, there’s been a lot of focus in the news on geopolitical tension, and how it’s driving up oil prices. And yes, it’s true that concerns about North Korea, Syria, and Iran have pushed up crude.
But prices continue to rise, even as these hotspots cooling off.
That’s because the real reason is the production collapse in countries you don’t see in the news.
Here’s what’s really happening to oil prices…
And the two simplest ways to play it…
Why Oil Prices are at Three-Year Highs
There are two factors involved in these higher prices. They combine improving underlying market dynamics with pressures that limit rapid increases in worldwide production.
The former refers to the emergence of an effective supply balance in broader markets as international demand continues to advance.
This allows for a stable supply surplus to mitigate rapid changes in pricing sentiment, resulting in a controlled rise in how traders regard the…
It is important to remember that prices for futures contracts (the paper barrels setting the prices for oil in actual trade – the “wet” barrels) must be estimated based on overall trader perception.
In our present situation, that obliges traders to set prices based on the expected cost of the most expensive next available barrel.
The latter consideration – pressures limiting rapid global wide production increases – considers two main global events:
- The drive by the Saudis to keep crude prices high, due to their need to provide as high a value for state oil company Aramco in advance of its IPO, and
- A continuing collapse in Venezuelan production, augmented by Libyan, Nigerian, and even Mexican extraction problems.
Added to all of this is the strong support to continue the OPEC-Russian production caps, along with some concerns that renewed U.S. sanctions again Iran will further constrict available international supply.
Of course, on the other side is the certainty that higher oil market prices combined with pressures against at least some main sources of foreign competition will result in expanded U.S.-based production.
However, this is not going to advantage American companies across the board. Some will be constrained by higher costs, more limited access to working capital (often a result of excessive debt burden or inability to roll over credit lines), as well as infrastructure and wholesale problems.
There are two main ways of approaching such an emerging market that would enable you to avoid having to weigh individual stocks against each other.
The first is to play the commodity itself, that is, crude oil, or oil in combination with natural gas. The second is to focus on a broader range of extraction companies.
In each case, there are exchange-traded funds (ETFs) available as a “one-stop shop.” Such funds are bought and sold the same way one transacts any retail stock share.
But the preferable move right now is with the first category…
How to Triple Oil’s Gains
My Energy Advantage members are already making money with two ETFs. Both of these are three-time “bull funds,” each reflecting underlying guides that include dozens of separate producers, weighted to compensate for the variances in U.S. production basins.
(Editor’s Note: Kent makes these sorts of recommendations in his premium Energy Advantage research service all the time. To see how you can join and receive all of them as soon as he releases them, click here.)
A bull fund provides a better return than the market as a whole – but only if the commodity prices are increasing.
Each of these ETFs will payout roughly 300% of the improvement in the market price of the commodity. The difference is found in what is covered.
ProShares UltraPro 3X Crude Oil ETF (OILU) is a 300% bull fund based on the closing price of WTI. That means the return here is pegged to a continuing rise in crude oil prices.
As expected, OILU has risen 16.9% over the past month, while WTI has 5.8%, and is also up 2% in the past two trading sessions.
Meanwhile, Direxion Daily Energy Bull 3X ETF (ERX) is up even more dramatically: 5.4% over the most recent week and a very strong 42.2% for the month.
ERX includes natural gas production as well as oil, and despite oil having the greater publicity of late, gas has been recovering. The Henry Hub benchmark rate is up 5.2% over the past month, but 5.6% since April 12.
The ability to target producers who are straddling the line between oil and gas is likely to accentuate the upturn. ERX, for the month at least, seems well-positioned for that.
But if there is a price decline, a 3X bull ETF will lose quicker than a normal ETF. Therefore, if you choose to move on this to profit from the upside, remember to place a trailing stop on your buy. I usually advise 30%.
A trailing stop like that triggers a sale once the stock declines 30% from the highest value it reaches while you hold it.
That not only provides some protection against large losses, it also allows you to insulate profits from a strong advance.
These ETFs are a huge factor in how my Energy Advantage subscribers are profiting from oil’s meteoric price rise.
But as premium members, they have access to additional recommendations – and get them as soon as I release them. To see how you could join them – and how you could make a combined 1,329% on four back-door plays as oil continues to rise – click here.
Sincerely,
Kent
