Oil Stocks Ready to Outperform in the Bull Market Rally of 2015

by Jason Stevenson

I’m wildly bullish on the stock market. But, as I showed you last week, over the next two months, it’s likely to experience a ‘false’ correction of up to 10%. Once this happens, it will skyrocket to new highs in 2015 — thiswill become the ‘bubble’ phase of the stock market rally.

The ‘bubble’ phase of the market is the easiest time to make money in thestock market. Almost everything goes up in price.

But the idea here isn’t to throw a dart at a dartboard. You want to pick the best stocks in the market, which will make you the most money.

But which stocks are likely to be the most profitable?

In my view, it’s tough looking past quality oil stocks. At the current oil price, quality oil players are making huge profits. And considering that the crude oil price is on track to hit US$150 per barrel in the next couple of years, shareholders will be laughing their way to the bank.

But the thing is, it’s difficult to findquality oilers on the ASX. Mainly because companies buy them out quicker than they can grow.

In February this year, I recommended Roc Oil [ASX:ROC] to Diggers and Drillers readers. Within six months, a Chinese company bought it out. Readers that bought when I first recommended it could have made a 40% gain. Last week, I recommended another quality oil stock to readers which I believe has the potential to become the next Roc Oil. And the nextDiggers and Drillers takeover stock. But I actually hope it isn’t taken over, because I see 90% plus gains on the cards for this stock.

Saying this, I did back Tangiers Petroleum [ASX:TPT] with its offshore Morocco well. I told readers that it was purely a speculative punt. In this case, readers could have lost the majority of their money if the well turned out to be a dud, which it was.

But there’s a big difference between speculative and quality stocks. As the oil price continues to rise, quality oil stocks should outperform.

Now, you may wonder how I can be bullish on crude when the price has fallen US$10 per barrel since June. It’s now trading below the psychologically important US$100 mark.

In my view, this price fall is short term noise in the big picture story.

Short term supply and demand is the reason for the recent oil price drop. Crude oil demand is lower as European and Chinese economic growth has slowed. At the same time, US shale oil and other key producing regions have left the global market well stocked with oil.

But remember, this is short term noise.

Known oil reserves are depleting world-wide and there have been minimal ‘elephant’ discoveries over the past couple of decades. On the demand side, it’s difficult to ignore that world population is growing in an energy intensive world.

But supply and demand is only a small part of this story…

What’s really going to set the crude oil price on fire is escalating geopolitical tensions.

Geopolitical tensions are rising around the world.

At the moment, you’re seeing growing civil unrest in the Middle East. In my view, this conflict will only get worse before it gets better. At the same time you have rising tensions between Japan and China and Ukraine and Russia. Not to mention, the ‘sanctions’ sparring match between the Western world and Russia — to state the least, things aren’t looking pretty and peaceful.

Prepare for less growth, less certainty and more geopolitical risk in the coming years. When the global financial system collapses — and it will — geopolitical conflicts are likely to only increase to new heights. As we saw after the financial meltdown of 2008/09, Governments blame everyone else but their own wrongdoings when the financial system and economy fail.

Become aware of what’s happening around the world. Because when geopolitical tensions and conflicts start to rise to new highs, crude oil will explode. As they say, the crude oil price is best proxy for geopolitical risk. 

So let’s take a look at the technical picture. The chart below tracks the West Texas Intermediate (WTI) oil price, the most common benchmark for crude oil; each bar represents one week.

The chart above is relatively simple to understand. It shows that crude oil has been in a strong bullish uptrend since 2005. You can see this by looking at the blue upwards channel.

Simply said, this upwards bullish trend looks set to continue into the future. The days of cheap oil and petrol are over. As geopolitical tensions rise, you should see crude begin to break out from this channel — similar to what happened during 2008.

But for now, the Fibonacci sequence levels tell much of this story.

Given the bullish trend in crude, oil now seems to be bouncing between the 38.2% and 50% Fibonacci sequence levels.

Adding to this, I showed you a different technical chart in June. On that chart, I showed that support exists around the US$96 per barrel level. Given that oil is trading at US$95.54 per barrel, it’s likely to be trading near a short term low.

As such, given the bullish uptrend and technical levels, it’s unlikely that the oil price will fall significantly in the short term. In fact, I’d be surprised if the oil price fell below US$90 per barrel on a bad day.

Adding to this, on the above chart, I’ve shown the slow moving stochastic indicator. This is a momentum indicator that uses support and resistance levels. It’s currently in the shaded area and shows that crude oil is heavily oversold. This only backs up my belief that oil should rally again soon.

As we head into 2015, I expect crude oil will be trading above the US$100 mark again. On a fundamental level, geopolitical tensions and sanctions between Russia and the Western world will be the driving force behind this move.

In this case, as crude moves along the bullish uptrend, the 38.2% Fibonacci level should soon become the primary support level. WTI must break through US$114 per barrel for crude oil to experience another impulsive bull market rally similar to 2008.

I’m bullish on oil and expect it to continue climbing along with oil equities.

Jason Stevenson,
Resources Analyst, Diggers and Drillers

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