One major company is up nearly 50% year-to-date!
It’s not Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN), the biggest kids on the block.
It’s the largest company by market cap from 2010, delivered huge returns in 2021.
I’m talking about Exxon Mobile (XOM).
But, before you make money moves, you might not want to chase its upside.
As we dug into this sector in our TrackstarIQ data, a few names popped up that likely provide better trades.
Right now, the energy sector ETF (XLE) shot up almost 40% this year.
The oil and gas exploration ETF (XOP) almost hit 50% this week.
Oil prices already eclipsed January and February of 2020. Yet, the U.S. Energy Information Administration shows inventory remains at historically high levels.
But here’s why oil prices and some key stocks could continue to rally in the short-term.
Supply and demand
At some point in the past, an economics professor likely imparted the following to his students, whether they cared to listen or not:
- Supply > Demand = Surplus
- Supply < Demand = Deficit
Simple enough, right?
In 2020, the pandemic decimated global demand. Oil inventories filled up so rapidly that crude futures went negative at one point (a great discussion for a later date).
Everyone from small frackers to large drillers shut in wells across the world, with some going out of business entirely.
The main players in the world outside the U.S. make up the OPEC cartel. This organization includes the largest energy-producing countries such as Russia, Saudi Arabia, Venezuela, and others.
This group didn’t particularly like the rise in U.S. energy competitors, nor the larger social push towards green energy. Yet, their only means of control lay in their production.
Covid robbed the coffers of sorely needed revenues. So, many expected they would jump at their first chance to increase production.
Surprisingly, they didn’t. Instead, they chose to maintain their lower output levels, even as prices soared.
What that means is global oil demand will outpace supply through at least April.
However, as we roll into the summer months, it’s unlikely that Saudi Arabia and other major players in the Northern Hemisphere will keep production low as domestic power consumption (and cost) rises.
This gives the sector potential for a bit upside over the next couple of months but could set up for a violent snapback.
TrackstarIQ to the rescue
Social indicators create a lot of noise. But if you know what you’re looking for within the data, it can lead to some interesting results.
Take a look at the tickers with the highest searches and views over the last couple of months.
Let us quickly give you a high level view of the oil industry so you can understand where each company falls in the supply chain.
Oil and gas companies primarily divide into three segments: upstream exploration and production, midstream transports, and downstream refining and delivery.
Upstream exploration companies live and die by the price of crude oil. Companies like Transocean (RIG) operate drilling rigs. And in the last several years, they haven’t fared well.
Yet, two of the top ones on this list, TransOcean (RIG) and Occidental Petro (OXY), generate positive cash flow from operations, even though they’re priced like they will declare bankruptcy any day.
These companies, and many that make up the XOP oil and gas exploration and production ETF, experience higher volatility, especially of late.
Next, you have midstream companies that operate the pipelines. They act like toll roads, charging by volume. Most form Master Limited Partnerships (MLPs) and pay hefty dividends.
Lastly, we have downstream marketing companies. These include your refiners as well as marketing and distribution such as Valero (VLO) or Phillips 66 (PSX). Downstream companies profit mainly from the difference between petroleum products and crude oil prices, known as the crack spread.
Integrated companies like Exxon Mobil hedge their business by doing a little bit of everything.
Why should all of this matter to you?
Well, notice that most of the companies in the top 10 are exploration and production (IE Upstream). And, as noted earlier, the associated ETF (XOP) outpaced the general energy ETF (XLE).
So…if you want to get more bang for your buck and expect crude prices to go higher, upstream plays are the way to go. Keep in mind they swing around more.
You’ll notice that we don’t find many downstream companies on this list on the flip side. That should tell you something about where institutional advisors expect movement.
One final thought.
When in doubt, the ETFs themselves, XLE and XOP provide solid investing and trading vehicles in lieu of specific companies.
