As I keep the motors idled up in the mountains, I’m still paying close attention to the major themes for 2022. Many major institutions have all increased their outlook for WTI and Brent crude oil in the year ahead. JPMorgan, Bank of America, Goldman Sachs to name a few. I’ve said that I too expect oil prices to hit $100 per barrel in the near future. The demand side of the equation is likely to outstrip the supply side.
Naturally, investors want to know how to play that potential rise. I advise that people pump the brakes a little on the speculative side and follow a pretty simple premise this year.
I’ve suggested that people invest for 2022 in energy as if they anticipate that the average price per barrel will be about $75 per barrel. This will give you a good sense of strong dividends and strong cash flow management in the event we have even a mild pullback in the near term.
I think traders should focus on momentum conditions and trade as if oil will swing between $65 per barrel to $85 per barrel. I think that people should speculate based on expectations that oil might go to $100 by taking calculated shots in the options chains.
And if you’re looking for a significant, statistical event around geopolitics, consider a more grey swan strategy with $55 per barrel and $125 per barrel as targets. Those would be very low-probability outcomes in the months ahead. But it could be possible if there is another serious variant of COVID. Or in a situation where Iran starts proxy battles around the key supply routes.
Start With Chevron
Whether you’re new to investing in energy or you’ve been doing it for years, you’re going to know the name Chevron (CVX). If this seems like too obvious of a stock, then, yes, it is.
But investors are smart to target energy companies with strong balance sheets that would benefit solely from rising oil prices. What I mean is that they don’t even have to pull crude out of the ground. They own large amounts of reserves and have healthy balance sheets. Because of this, they can just allow prices to rise in crude, and then enjoy a boost to their valuation.
Chevron fits the bill.
Wall Street is enamored by the stock. Truist Financial just upgraded the stock to a price target of $167 per share. This is based on high oil prices, natural gas stabilization, and strong cash flow.
Chevron currently has an F-Score of 7 combined with a Z-Score of 3.19. It’s P/E ratio is a bit high compared to the rest of the industry. However it remains low compared to its historical performance.
Chevron stock looks ready to continue a controlled climb. You can use in the money calls to take possession of 100 shares for well less than what you would need to buy 100 shares ($12,850).
Or you can sell cash-secured puts to pick the entry price of your choice should there be a pullback. Regardless, start here. We’ll look for small-cap entrants tomorrow