An Oil Blowout

Hey There Income Hunters,


I have been very positive on the Energy sector for several months now for a few reasons …


  • The pandemic slowed down production considerably, which will create a shortage of supply once the economy picks up …

  • That will drive oil prices towards $65 by year-end which is as much as $10 above prices built into forecasting models … 

  • The transition to electric vehicles will take longer than anticipated. Much of the demand for oil comes from heavy duty vehicles, aviation and the petrochemicals industry, where there are few alternatives… 

  • Lastly, global production outside of shale has been flat for the past five years, so that could add to the pressure on the price in the years ahead as well …

And look at the chart below. That is one explosive rally … 34 to 60 in under 3.5 months!

What I Like

Now, the Relative Strength Index (RSI) — a very useful momentum indicator — is in overbought territory, so we may see a bit of pull back in crude.

However, there are a few very good producers and midstream companies that are trading at a nice discount, plus offer a bonus dividend, as well.

Enbridge Inc. (Ticker: ENB) is a great pick that surprisingly traded off a bit after good earnings, so I jumped at the chance to add to our energy positions.

Enbridge is a Canadian multinational company, so right away I love that they offer diversification away from the US. Also …

  • The company’s liquids business transports 25% of North America’s crude and operates the longest transportation system in North America.

  • Its gas transmission business supplies 20% of the natural gas consumed in the U.S. Gas distribution is No. 1 by volume and delivers a massive 1 trillion cubic feet of natural gas/year.

  • From a power perspective, the company has an impressive renewable energy business (1.8 GW) that it’s focused on growing.

Fire Up the Power Income Valuation Model

 

With ENB currently trading at 34.57, it is priced at a discount of 26% to fair value!

Here’s My Trade

Based on the ENB chart below I wanted to play a tight call spread feeling confident ENB will test the down trend…

Yesterday, I purchased two 35/40 call spreads to Jan 21, 2022 at $150 per contract …

My max loss is $300 and max profit is $1000 so a 3.3-to-1 risk/reward ratio.

Bring it Home

I would like to see crude correct a bit now because I’d like to pick up a couple of other midstream companies, including: Kinder Morgan Inc. (Ticker: KMI) and Enterprise Products Partners (Ticker: EPD).

It was another wild week of money flowing into the reflation trade as we continue to see more cash flow into the market overall … 

I am looking forward to a three-day weekend and I wish everyone a great weekend and happy Valentine’s Day, when you should definitely …

Live and Trade With Passion My Friends,

Griff


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