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Home>UPDATE: How to trade oil's big comeback rally

UPDATE: How to trade oil's big comeback rally

UPDATE: How to trade oil's big comeback rally

10/06/2017

By Jeff Reeves, MarketWatch

Downcast energy sector is showing signs of strength

So far, 2017 has largely been another year of pain for energy stocks.

Crude oil is bouncing around the $50 mark, placing it down about 14% from where it started the year. A host of energy stocks have been seeing similar trouble, with the popular Energy Select Sector SPDR Fund (XLE) down more than 9% since Jan. 1.

Meanwhile the S&P 500 has rallied more than 13% and continues to set new records (http://www.marketwatch.com/story/why-stocks-may-be-on-verge-of-a-melt-up-2017-10-04)like clockwork.

Yet while the long-term trend of the energy sector is unpleasant, there have been signs of life in the oil patch since its August lows. After bottoming out around $42 a barrel, crude oil prices have rallied nicely as of late, all things considered. And some of the biggest energy names have firmed up, including oil major Chevron (CVX) which is up about 8% in the past 30 days.

Is this just another short-term uptrend before trouble returns, or are energy stocks looking like a good play here now that the dust has settled? I think it's the latter. Here's why, and how to play this comeback in oil:

Not all energy stocks are hurt by storms: There was a lot of talk about energy stocks being hurt by recent weather woes. The damage from Hurricanes Harvey and Irma obviously disrupted many parts of the American economy, and caused significant downward revisions (http://www.marketwatch.com/story/gdp-estimates-come-tumbling-down-for-the-third-quarter-2017-09-15) to GDP forecasts in part because of energy disruptions. But savvy investors noticed that refinery shutdowns in the South greatly benefitted operators elsewhere, as the spread widened between oil and gas prices to boost margins. Stocks like Valero Energy (VLO) , which operates refineries in California, Tennesee, and Canada in addition to its Southern operations, were net winners-- as evidenced by a 15% rally for Valero shares in the past six weeks or so. Now that the dust has settled, disruptions don't look as bad as once feared.

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