There’s no question that it’s been a tough time to be an oil investor.
After hitting $112 in 2014, prices dropped to $26.21 in 2016 — a 76% decline.
Then, after prices nearly doubled last year, light sweet crude has fallen 9% in 2017.
The seesaw action has wreaked havoc on the resolve of oil bulls. And the prospect of U.S.-based frackers flooding the market with oil again could weigh down prices even more.
But if OPEC’s recent agreement to hold down production in an effort to reduce oversupply sticks, there’s a lot more upside ahead.
Senior analyst Jonathan Rodriguez provides the perfect way to profit from the momentum.
Don’t Buy the Hype… Oil is on the Upswing
Oil’s had a rough ride over the last three years. But the market is providing one of the best opportunities in history to establish a position.
Why?
The war waged between the Saudi Arabian-led OPEC and U.S. frackers may soon be over.
As you likely know, in an effort to starve out low-cost shale drillers that were gobbling up market share, OPEC revved up production to record-breaking highs.
This drove prices from more than $100 a barrel to less than $30 — a multidecade low.
And for the last three years, the world has been overrun with far more oil than it needs.
At the end of 2016, global oil production hit 98.3 million barrels a day (mb/d), according to the International Energy Agency.
Worldwide demand, on the other hand, came in at 97.9 mb/d.
At present, the world is still oversupplied by about half a million barrels a day.
But starting in January, OPEC — the cartel of 13 oil-producing nations — finally agreed to curb oil production by nearly 2 million barrels a day through mid-2017.
And so far, OPEC has registered a 90%-plus compliance from member nations.
The production cut helped boost the price of West Texas Intermediate crude as much as 20% since November.
All of this is leading to a supply-demand balance that could happen as soon as this year.
In fact, the U.S. Energy Information Administration forecasts a 2018 average price of $56 a barrel.
That implies upside of about 11% from current prices.
Here’s how you can cash in on the biggest returns…
Correlate and Dominate
As you might imagine, the safest play on oil would be diversified, mature large-cap oil firms.
Indeed, income investors have come to love the (usually) steady flow of oil dividends.
But because of their size, these firms are slow to react to sudden spikes in oil prices.
However, small-cap firms are far more nimble and enjoy a much larger bounce when crude prices rise.
In fact, many shale drillers — which can be profitable with oil as low as $50/barrel — are included in this group.
And the PowerShares S&P SmallCap Energy (NASDAQ:PSCE) tracks some of the strongest small-cap energy firms in the U.S.
Over the last year, PSCE has gained 23%, versus a 14% gain for XLE (NYSE:XLE) — the ETF that tracks large-cap energy names.
In fact, since oil bottomed in early 2016, PSCE has gained 65%. That’s more than twice the gain of large-cap energy stocks over the same time frame.
While both ETFs enjoy a strong correlation to the price of crude, PSCE provides traders with a bigger bang for their oil buck.
Of course, this also means that PSCE is more volatile than XLE. But traders are well compensated with capital gains for the added risk — and stand to profit in a big way as oil recovers.
Better yet, if Trump follows through on his plans to break the regulatory shackles on offshore drilling, small-cap firms will benefit even more.
Bottom line: Make no mistake, oil is roaring back to life. And the biggest gains will go to the smallest, most agile companies. PSCE provides diversified exposure to some of the highest-quality small-cap firms of the bunch.