If you’ve been following Godesburg’s Haven Investment Letter, you know that I’m very bullish on oil prices. Since oil traded most recently in the $60s, I’ve been calling for $100 per barrel oil. I’ve noticed a number of Wall Street firms joining the chorus over the last few weeks.
With West Texas Intermediate (WTI) climbing past $92 this morning, investors are wondering WHEN and not IF WTI crude prices will hit the triple-digit level for the first time since 2014. That price level should come in the months ahead. WTI – the benchmark for U.S. crude in New York – remains in very high demand around the world due to its “sweeter” ingredients.
What I mean by sweeter is that WTI has less sulfur and is thus easier to refine and process. Nations like India and South Korea have been ramping up imports from the U.S. to meet their rising demand. This is thanks to the lifting of COVID restrictions and demographic shifts.
Volatility in Oil Prices
It’s worth noting, however, that U.S. crude prices are overheated. In December 2021 – yes less than 60 days ago – WTI traded under $70 per barrel. This surge has been nothing short of spectacular.
Even though investors are raking in profits right now… I urge some caution at these levels. As I eye a few producers like Marathon Oil (MRO), their stocks have high Relative Strength Indices (RSI). This signals overbought territory.
This is a BIG RED FLAG if you’re an investor or a trader. Market momentum on more than 8,500 stocks has been negative since January 12. The energy sector – meanwhile – has been the ONLY S&P 500 sector (of 11) that has maintained positive capital flows and price strength since that time.
A selloff appears possible just because investors want to take profits off the table in a market that continues to bleed across the tech, semiconductor, and other “expensive” sectors. If you own any energy stocks, here’s what I recommend that you do.
A Contrarian Sign
WTI climbed above $90 this week and the recent price calls of $100 by several Wall Street banks. I’m willing to take any odds that tomorrow’s Barron’s reports on this as their FIRST or SECOND top story. The other being the jobs report and near confirmation of a rate hike coming in March by the Fed.
If Barron’s is telling you “how to invest for higher oil prices”, you can bet that the trade will be taking a time out for a little while. And – thus – profit taking might be in the cards. By that point – the trade is largely expired, and you have to poke around for some value.
If you own any of the companies that have benefited from a BIG surge (think Exxon, Chevron, Marathon, Devon Energy, Diamondback etc.) and you have at least 100 shares, take a look at the stock’s Relative Strength Index (RSI). Remember, an RSI over 70 signals that the stock is overbought.
If you have a stock like MRO that has a high RSI, consider selling some covered calls on the stock. You sell a call option at a higher price. This gives another trader the RIGHT, but not the obligation to purchase the stock from you should it reach that strike price. I’ll give an example.
How to Trade Elevated Oil Stocks
Let’s say that you own 100 shares of MRO at $21.58 today. You could sell the $22.50 call for February 11, 2022. This is two legs up in the options chain and out of the money – for $.30 – or $30. Now this means that your breakeven price – for NEXT FRIDAY – is $22.80.
That means on your 100 shares, the stock would need to go up another 4.2% before the contract could be executed. And it would need to jump another $1.22 (or $122) or another 5.6% before it passes your “breakeven” level.
That’s a pretty sound trade that allows you to take advantage of higher volatility and a big surge in the stock’s underlying price in recent weeks. Even better, there’s little downside. The worst case scenario is that the stock GOES UP, you sell your shares to the person who bought the calls, and you MAKE money.
If the stock never reaches that level, you get to pocket the difference. Use this situation to your advantage, and use this strategy on a weekly basis while volatility remains elevated.