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"How To Play Rising Oil Prices"

https://seekingalpha.com/article/4128785-play-rising-oil-prices

How To Play Rising Oil Prices

Nov. 30, 2017 12:27 PM ET

Summary

Oil prices have risen 40% in the last five months, but this is just the beginning.

I expect oil equities to outperform the major indices in 2018.

In this article, I propose a diversified way to play the rising oil prices.

This idea was discussed in more depth with members of my private investing community, Tesla Forum.

Investment Thesis

As my followers know, I keep a close eye on the energy sector and, in my opinion, the world is headed into an energy crisis. I expect oil prices to rise significantly in 2018 and beyond, and oil equities to rise even further as many companies in the sector remain deeply undervalued. The Energy Select Sector SPDR (XLE) is an efficient way to invest in energy.

Energy Crisis

Oil inventories, when compared to their five-year average, have declined throughout 2017, and at an accelerating rate starting in May 2017:

There are three primary reasons for this ongoing decline:

1) Global demand for oil has surprised to the upside,
2) U.S. oil production growth has surprised to the downside, and
3) OPEC's production cuts accelerated the balancing process in 2017.

I see all three factors continuing to play a role in 2018. If you'd like to look through my nearly three dozen articles on the topics listed above, please visit my author page for a comprehensive list. I specifically recommend the following:

"Is Oil Boiling Under The Surface?"
"Expect Global Oil Production Growth To Slow Down"
"Significant Oil Demand Revisions"

All of these are recent and provide investors with a solid discussion of my oil price expectations.

How to Play Rising Oil Prices

My primary investments in my focused portfolio for 2018 will be Tesla (TSLA) and two offshore drillers: Ensco (ESV) and Noble Energy (NE), all of which I estimate are deeply undervalued compared to their respective long-term intrinsic values. If you'd like to read specific articles on these three companies, please refer to my author page.

Investors who are interested in a more diversified portfolio, however, should consider the Energy Select Sector SPDR, which is made up of the following top 10 holdings:

I also have previously issued buy ratings on several of the components listed above, including Halliburton (NYSE:HAL) on Sept. 24 and Exxon Mobil (NYSE:XOM) on Sept. 25. I will continue to analyze news, earnings reports, and other fundamental indicators for these companies, and others, for my followers.

My Oil Price Expectation

Given that (1) OPEC decided to extend its cuts until the end of 2018, (2) the global demand for oil is expected to continue higher as global GDP proves resilient despite higher interest rates, and (3) U.S. oil production will rise but the growth rate will continue to disappoint shale hopefuls, I expect oil prices to rise to above $80 per barrel in the coming months -- and possibly further in the second half of 2018.

Bottom Line

Oil prices have risen by more than 40% in the second half of 2017, but this is just the beginning. Because energy equities have not yet reacted to the recent surge in oil prices, I expect the energy sector to be a winner in 2018. I am invested in Tesla, Ensco, and Noble Energy because these companies are even more deeply undervalued compared to others in the energy sector, but for investors who prefer a diversified portfolio, I recommend XLE.