Oil sector is ready to rise - January 07, 2018

Oil sector is ready to rise

Crude and the whole oil sector may have a great year. The oil service sector is at a historical low according to the valuation models, while crude price is constantly rising since hitting the bottom in 2016. This could lead to a turnaround as we already mentioned this in our yearly prognosis, but the subject worth a deeper look.

We mentioned a week ago how energy sector is seriously undervalued according to historic valuation models. This might be especially true for the oil sector as it remained at the low end in the last years, even after crude prices started to rise. The sector itself didn’t follow this rise, but that can change now.

Oil can go higher

Oil prices slumped in the last decade, but 2016 was a turnaround for crude. Ever since then prices are constantly rising. Last year, they were around $40-55 per barrel, but this year, they can go even higher. It wouldn’t be surprising to see prices around $55-70.

Oil probably won’t reach heights like it did in 2014 when it was around $120, but a decent rise may come this year. This can not only help oil dependent countries (like OPEC members), but could positively influence the whole sector around the globe.

OIH started to rise

In the last weeks, OIH (an ETF based on American oil companies' stocks) had a serious rise in its price after meaningful consolidation and keeps on rising since then. This shows that investors started to realize the value in this sector, and began pouring money in these stocks, so this can easily lead to a new, better era for the sector. This rise now focuses mostly on the US but may have a broader effect.

This may be the tendancy during this year and could lead to a positive correction in stock prices. It’s hard to say how high prices will go, but a 10% rise in the oil sector is more than realistic.

The investor’s viewpoint

Generally, oil sector was always a good investment, since good dividends were always paid, even in tougher times. But now investors started to believe that this might be a good time to buy oil sector’s stocks, as better returns may come.

The main truth in investing remains still: diversification is advised, even if a sector seems to perform exceptionally. Because putting your eggs in one basket is never a good idea.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.