Editor’s note: The markets and our Chaikin Analytics offices will be closed Monday, February 21, to commemorate Presidents Day. Because of that, we won’t publish the Chaikin PowerFeed e-letter. Look for your next issue on Tuesday, February 22.
Oil prices are on the rise… And current events suggest that isn’t changing any time soon.
Russia recently positioned at least 130,000 troops near its border with Ukraine. Estimates indicate that it’s near the level of military power needed for a full-scale invasion.
This week, reports said that Russia started relocating some of its troops. But an attack could still begin at any moment… The world seems to be teetering on the edge of war.
The Western world is threatening economic sanctions to deter Russia. Officials have threatened to end a massive pipeline project from Germany to Russia if Russia invades Ukraine.
Cutting off this energy pipeline would cause a lot of pain to the Russian people. And for the rest of the world, it would create a massive energy shock.
Additionally, oil cartel OPEC isn’t increasing production at the rate its members agreed on. As a result, the world’s oil supply remains limited as prices approach $100 per barrel.
On top of all of that, President Joe Biden hopes to decrease U.S. reliance on nonrenewable energy sources. And in pursuit of its agenda, Biden’s administration seems like it would prefer pain at the pump over admitting the reality that the U.S. still needs a lot of oil.
Folks, it’s time to place bets on rising oil prices. Now, the question is…
What’s the best way to do that?
You might think any oil company will do. And yes, most oil companies do thrive as prices rise. But as we’ll cover today, one segment of the oil sector typically outshines the rest…
You see, the oil industry is broken down into three different segments.
The first segment is called “upstream.” Upstream oil companies are the first step in the process of getting oil to consumers. They focus on actually extracting it from the ground.
The second segment of the process is made up of “midstream” companies. Midstream companies are responsible for transporting oil once it has been extracted. When oil prices rise, the cost of their transportation increases… but so does the price at which they sell.
The third segment is “downstream.” These companies are in charge of refining the oil to make it usable for folks like you and me. They’re also in charge of marketing and more. As prices rise, downstream companies must pay more for the oil from midstream companies. Then, they pass the higher costs on to consumers.
And finally, “integrated” oil companies combine all three segments. They’re the most recognizable names in the sector – supermajors like Chevron (CVX) and ExxonMobil (XOM).
So which segment is most profitable when oil prices rise?
I looked at the seven most recent periods of significant oil-price rises since 2012. Then, I analyzed how the largest three companies in each segment performed during those periods.
Our benchmark is the Energy Select Sector SPDR Fund (XLE). It holds a collection of 21 energy companies from all of the segments. So it’s a great barometer for the overall sector.
Here are the average price returns based on those conditions…
As you can see, XLE averaged a 26% gain during the seven significant oil-price rises since 2012. The midstream, downstream, and integrated averages were all about the same.
In other words, these three types of companies performed in line with the market.
But take a look at the upstream segment… These companies outperformed in a big way. They climbed an average of 37% across these seven periods.
The data is clear… When oil prices rise like they’re doing right now, upstream companies perform the best. Take a closer look at this specific segment today.
Good investing,
Karina Kovalcik
Editor’s note: We encourage you to start your research into the best upstream oil companies with our Power Gauge Report newsletter. In the February issue, which just published last night, editor Marc Chaikin recommended a heavy hitter from this segment. This company has a history of soaring alongside oil prices. And if things play out perfectly, Marc believes the stock could more than double in the coming months and years. You can get all the details as soon as you sign up for Power Gauge Report right here.
