At the Forecast we are always on the lookout for large trending trades. We anticipate energy, oil, and gas to be one of our best trades of 2021. We have commented on this sector in a past briefing and since then energy has experienced a substantial move. We have been in a couple of energy trades that have performed well over the past month at the Forecast for our gold members. The oil and gas services stocks are by far the most depressed of the entire energy sector. Goldman Sachs recently upgraded their crude price target for 2021 of $72+ into summer. We expect price to exceed that level sooner than expected. Many people struggle to understand why crude, oil, and gas would rally this year with a new green US administration that wants to jettison fossil fuel energy as soon as possible. When we examine the macro outlook on energy, we see some interesting facts. First, most major oil and gas companies reduced or eliminated exploration and new well production due to Covid. As older wells dry up, the supply to replace them is minimal. Secondly, as the world gets vaccinated we start to enter a post-Covid economy where demand is increasing and energy is needed. Thirdly, as the new administration starts to restrict drilling on federal lands, supply is being choked further. Throw in global inflation from closed down economies for over a year and massive money printing and you have even more fuel for the fire.
OIH has many mid-cap names that comprise its price and offer explosive upside. However, XLE has more larger cap names and offers less volatility with slightly less upside.
We recently sold Continental Resources with a healthy profit. When investing in individual names, caution is always warranted. The new administration may come out and restrict shallow water drilling, limit fracking, and reduce pipelines that carry supply. Knowing what kind of production and where it comes from is critical for the company you own. In the case of Continental, they have a 7% exposure on federal land drilling, but other companies are not so lucky and can be effected by new drilling bans. In light of the new dynamic regulatory environment, we favor ETF’s like OIH and XLE to reduce risk for long term investing in this sector.
Energy is coming out of a multi-year low and we expect sentiment to embed like it did back in 2018 as this move continues throughout the year. We expect oil and natural gas futures contracts to provide great value as price increases. We expect a short term pullback in energy over the next few days, but see higher prices into spring. We will continue to harvest profits for gold members in this sector. We have two energy trades currently in our trading grid and intend to add others in the near term.
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