The Next Big Move in Energy is Coming Soon: Here’s How to Cash In
Energy has been one of the hottest sectors of the S&P 500 Index (SPX) lately, gaining 14.2% year-to-date and second only to the utilities sector in overall performance. But since April Fools’ Day, energy stocks have mostly moved down or sideways – with the sector down about 0.75% since.
That’s because crude oil has declined from more than $87 a barrel back in April to about $79 today. But now it looks to me like that’s all about to change.
A looming rise in oil prices, triggered by “phantom” oil production, is bound to bring stocks in the energy sector back into the lead. And now is the time to position yourself to cash in.
U.S. Oil Production Not What It’s Cracked Up to Be, and That’s Bullish
The U.S. Energy Information Administration (EIA) is tasked with tallying domestic oil and gas production and monitoring inventories. And like many other Beltway-based government agencies, I’m sure the folks at the EIA bring their best efforts, but still fall short at times.
Turns out that last year, the EIA set out to “improve” the way it counts U.S. oil supplies by making changes to the adjustment factors used to help balance the books. I won’t get into the weeds on this, but energy analysts at HFI Research do a great job explaining it in detail.
Suffice it to say that prior to this, the EIA had typically underestimated U.S. oil production. But since last year’s new adjustment factors were introduced, it now tends to overestimate production.
The net result is that the EIA figures that headline U.S. oil production grew by about 1 million barrels a day from 2022 to 2023… when according to HFI Research estimates, actual U.S. oil production increased by just 400,000 to 500,000 barrels a day, or just HALF as much as the “official” EIA data claims.
So, here’s the punchline: Domestic oil production growth is likely much lower than what the official data says. This means going forward, actual oil production could surprise to the downside, falling short of expectations.
Basic supply and demand says that, with U.S. oil production less than advertised, the oil supply is tighter than markets think right now. And that means oil prices are bound to rise.
And as you can see in the chart below, crude oil inventories typically decline at this time of year, with the peak summer driving season (and gasoline demand) just ahead of us.
Lower seasonal supply in the months ahead puts upward pressure on prices either way.
Now, add lower-than-forecast U.S. oil production to this mix and you have a recipe for a big rally in oil and energy stocks.
And sure enough, our TradeSmith cycle-timing indicator below tells us that oil is in a Valley turn area and forecast to move higher from here:
Likewise, our Volume-at-Price indicator and the TradeSmith Smart Moving Average both show solid price support to power an upside reversal.
How to Uncover the Best Energy Stock Opportunities with TradeSmith Screeners
With all this in mind, let’s run an easy screen for healthy, high-quality energy stocks that may be primed to turn higher with the next rally, according to our timing indicators.
You can set up the screen shown above for yourself. Just log in to TradeSmith Finance and, from the main menu, click on Invest, then Screener, then + Create new screener.
Now click on + Manage Filters at top right, and add the filters shown above. The seasonality filters are available to subscribers of our Trade Cycles product, as well as TradeSmith Essentials and TradeSmith Platinum. If you don’t see these options in your TradeSmith Finance dashboard — and would like to — call 888-623-0858 to discuss.
I’m looking for healthy stocks in the Green or Yellow zones, in the Energy sector, and in a Valley or Upcoming Valley turn area.
Next, I’m looking for quality stocks with a Business Quality Score of 70 or more. That limits your list to the top 30% of stocks in our database ranked by quality.
We already have favorable cycle indicators working for us. But for an extra layer of bullish trade timing, let’s also add Seasonality.
Here I’m looking for stocks with a Seasonal Pattern Accuracy Rate of 70% or more and a Seasonality Pattern Average Return of more than 5% during the last 10 years under review.
Finally, let’s look for near-term buying opportunities in stocks with a Seasonality Pattern Start Date within the next 60 days.
When I ran this Screener after Monday’s close, I got eight results, shown below. That’s an easy-to-manage list for further research.
But you can always tighten or loosen these filter parameters for fewer or more results. And don’t forget to make this Screener your own by adding any other filters and TradeSmith indicators that appeal to you.
By clicking on the blue number in the Seasonality Patterns column, you can see all the details for the upcoming bullish seasonal trade window for each stock. I singled out Oceaneering International (OII) to highlight the details.
OII has a bullish seasonal pattern starting this week and extending into early June. This pattern has a 90% accuracy rate for the past 10 years, and the stock has posted an average return of 10.75% during that window.
Mike Burnick’s Bottom Line: Oil and energy stocks look primed to surge higher again, and our TradeSmith Screener tool can help you zero in on the best opportunities. Plus, these stock results are primed to move higher within the next 60 days, making them interesting ideas for option trades. In my Thursday column, I’ll show you how to buy leading energy stocks and get paid cash instantly when you place your trade. Stay tuned.
Good investing,
Mike Burnick
Senior Analyst, TradeSmith
P.S. In less than an hour, my colleague Eric Fry, from our affiliate partner InvestorPlace, will host a presentation about what he believes will be the next trillion-dollar company. It’s using AI to transform an entire industry, just like Nvidia did for AI hardware. The event begins at 7 p.m. Eastern, so click here to automatically join now.