How to make money from the bull run in oil prices even if you missed it so far

by 16 Jan, 2018

Nordstrom Kohl's Target Macys


Amidst a period of soaring oil prices due to the closure of the Forties pipeline and OPEC nations signalling their commitment to production cuts, investors who bought into the market 3 months ago would have bagged a 25 per cent return on their investment so far. The price of Brent Crude sits just below the $70 mark at the time of writing, having increased by nearly $15 since October, representing some of the largest gains since 2014.

Is it too late for those who didn’t buy oil to take advantage of the price gains? J.P. Morgan strategists argue not. If investors buy energy stocks instead of oil or oil futures, returns could be impressive.

“Oil scratching $70 a barrel is perhaps a more interesting milestone than new highs on stocks,” strategists from the bank said in a note from January 12th.

Prices can stay high in this year’s first half, and energy stocks are “the only proxy that still trades cheap to current or even longer-dated oil futures,” they wrote.

Indeed, the bank argued that the biggest energy stocks ETF (the Energy Select Sector SPDR ETF) is up 7 percent in 2018 so far, but only up 14 per cent over the past 3 months. This means it still has some catching up to do to reflect the more than 20 per cent rallies in both crude and Brent over the same period. Buying so-called ‘oil proxies’ could offer a better risk-reward than snapping up oil futures. Among popular proxies are energy stocks, Russian equities, energy credit and ‘petrocurrencies’ such as the Russian Ruble.

Oilfield services firm Halliburton is a prime example, having become the latest oil company to report a brightening outlook following the rise in commodity prices in the latter half of 2017. On January 22nd the company revealed a massive increase in earnings per share (53 cents for Q4 2017 compared to just 4 cents in the same period of 2016) as well a massive gain in revenues, which were up 89 per cent at $3.4 billion.

Though oil already had a stellar run in the latter half of 2017 (see the chart), J.P. Morgan Head Economist Jim Glassman argues in a separate article that the improving global economy will push prices higher still, saying: “In the coming decade, global demand for oil will likely continue to rise, supporting firmer prices. This demand will be led in part by the spike in global automotive sales, which topped 94 million vehicles in 2017—a rise of about 50 percent over the past decade. Consumption is projected to climb from the current 98 million barrels a day to 115 million barrels a day in 2027. As developing economies grow richer, the emerging middle class will consume ever more energy.”

Related: Oil markets touch 2-year highs while world stock markets show great health

Nordstrom Kohl's Target Macys

The Invstr technical analysis chart shows the major gains in Brent Crude over 2017 and early 2018

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