Energy Stocks Look Attractive on Soaring Oil: Top Trade Opportunities

Oil prices, which were already rising due to supply-demand mismatches, skyrocketed into the triple digits, hitting levels not seen since 2008. This was due to a growing risk premium and interruptions in energy trade flows as big foreign purchasers started to shun Russian oil in order to avoid being indirectly involved in sanctions.

Energy companies, as expected, benefited from oil's decline, continuing on a robust rise that started last year. The Energy Select Sector SPDR Fund (XLE) and SPDR S&P Oil & Gas Exploration & Production (XOP) ETFs have soared more than 40% year to date against this background. It's reasonable to ask if the energy sector's outstanding performance would continue in the months ahead after such a tremendous run. I believe it will, which is why I keep a positive outlook on the energy complex.

The optimistic thesis is based on the belief that oil prices would rise in the medium term, notwithstanding the present market deficit, which is expected to remain through the end of the year.

This is owing to the fact that some Russian barrels have been removed from the market, US producers have maintained drilling restriction, and OPEC is struggling to raise production due to capacity limitations. While the prospective resumption of the 2015 Iran nuclear agreement might alleviate the tight supply situation, Tehran will not be able to instantly raise exports. In reality, most of its supplies may not be available for another 6-8 months.

With WTI expected to stay above $100 per barrel for at least the next two quarters and a breakeven price of $40 to $50 for shale drilling, the exploration and production (E&P) industry should make billions of dollars in profits, accelerate its deleveraging process, and boost shareholder returns through large buybacks and attractive dividends. In a $100/barrel pricing scenario, balance sheet metrics will improve dramatically, allowing the business to attain an FCF yield of 20% on average this year, making it one of Wall Street's greatest offers.

Investors may start to emphasize prices and concentrate on firms with good margins and consistent profits growth in the future. This is due to the high volatility environment and widespread de-rating in various market segments due to monetary tightening, inflation headwinds, and declining activity.

The US E&P sector is well positioned to profit from the changing investing environment, and it seems that it will continue to prosper in the months ahead.

I occasionally skip single-stock investments to prevent business execution risk. In this situation, I'd rather use the XOP or XLE ETFs to show my optimistic outlook on the energy sector. Both funds are appealing, however XOP has a bigger exposure to increased oil prices (XLE is "better quality" since it solely follows businesses in the S&P 500, but it does have some exposure to the equipment and services oil category, which might be harmed by higher input costs and wage inflation).

In terms of technical analysis, XLE is nearing significant resistance at the time of writing, which ranges from 78.55 to 80.25. This stumbling block hasn't been overcome since 2015. A break above it is expected to elicit substantial buying activity, and pricing may be on its way to challenging the 84.00 level. The attention goes up to the November 2014 highs around the crucial 90.00 level as the market gains more vigor.