WINDERMERE, Fla. (Stockpickr) -- Here we go again. Crude oil is closing in on $100 a barrel, and it's happening faster than I think most traders want to believe.
Recently, crude oil traded through the $90 level, which marked a 26-month high. The bulls in the crude market are saying that oil is experiencing a "demand shock" due to consumption growth, which this year is almost at its highest rate in 30 years. The bulls will tell you that demand is being driven by a recovery in global economies from the depression-like levels we've seen in the last few years. Many analysts will also tell you that crude oil demand is being spurred by emerging market expansion in China, India, Brazil and the Middle East.
What's really interesting about the current strength in oil is that it's happening in the face of a strong dollar. Usually, commodities that are dollar-denominated trade lower when the dollar strengths. However, that's not what we're seeing right now with crude oil. It's trending higher despite the fact that the dollar has been strong, and I think this has caught a lot of market players off guard.
Whenever I see a market decouple like this, or a stock do something that nobody thinks is possible, I revert back to my trend-trading acumen and remember that price always pays. If you've been shorting oil hoping for it to drop based off of the action in the dollar, then you've been fighting the trend. Since early November, the dollar has soared from its lows around $75.60 to its most recent highs at over $81. During the same time frame, crude oil initially sold off from $88 a barrel to around $80, but instead of continuing that trend lower, it bounced huge and rallied from $80 to over $90 a barrel.
Why is oil trading so strongly despite the strong dollar? There are probably a number of solid reasons for the strength in oil, such as quantitative easing, which many traders view as an inflation-causing policy. Market players could be bidding up the price of oil in anticipation of more quantitative easing (QE3) that could be coming down the road. We also have a war premium in oil that could have re-entered the equation following North Korea's most recent hostile actions towards South Korea on Yeonpyeong Island.
The most exciting reason for higher crude oil prices is that the world economies are truly starting to recover and much of the current economic optimism is warranted. If this is indeed the case, then I would expect to see crude oil trade well above $100 a barrel going into 2011.
With that in mind, here's a look at a number of
The most obvious way to play oil is to buy oil-related equities that will benefit from higher crude prices. One of my favorite names in the space is
, an Argentina-based integrated company primarily engaged in the energy sector. Petrobras conducts oil exploration and production activities in Argentina, Bolivia, Ecuador, Peru and Venezuela. The primary location of Petrobras is one reason to absolutely love this stock since it's highly concentrated in the hot South American emerging markets.
Another reason to consider playing this stock is for its solid dividend of 57 cents a share which equates to a yield of 2.4%. The stock trades at a forward price-to-earnings of 14.8 and has relatively small market cap of $2.4 billion. Quarterly revenue growth year-over-year is estimated to be at 21%, so there is plenty of room for this stock to expand into a higher price-to-earnings.
What I like even more about this stock is that it's displaying relative strength. Shares of Petrobras are currently trading at new
around $23 a share. Plus, the stock just broke out above some previous overhead resistance at around $21 a share on above-average volume.
The next area of resistance on this stock doesn't come into play until the mid-$30s, and the all-time high on the stock sits around $60 a share. That could mean the stock has plenty of room to run higher, especially now that shares are trading in breakout territory.
Another solid oil play is
. This company primarily engages in the exploration, production, and sale of crude oil and natural gas primarily in the People's Republic of China. This stock is one of the most attractive plays in the oil space due to the company's cheap valuation versus its growth potential. The stock currently trades at a forward price-to-earnings of 9.79, but PetroChina is estimated to grow earnings next year at around 22%.
This stock also pays out a handsome dividend of $4.22 a share which puts the yield at around 3.30%. Shares of PetroChina could have tremendous upside and the stock is also acting technically strong. Shares are trading around $128 a share, about 8 points off the 52-week high of $136 a share. If the stock can take out some previous overhead resistance at around $131 a share, then I would look for another run toward the 52-week highs around $136.50.
A few more oil names you might want to consider that are acting technically strong and trading near 52-week highs are
( REP). I like these names because they already have price momentum, so if oil does break out and head above $100, these names should continue to follow their current path of least resistance which is higher.
Alternative energy could once again come back into play if oil wants to trade much higher in the near future. However, this sector is currently under a lot of pressure from the bears since a number of solar names have very high short interests. This could actually help to work in moving these stocks higher if traders do start to rotate in the space.
One name I would consider in the solar space is
Energy Conversion Devices
( ENER). Through this company's subsidiaries, commercializes materials, products and production processes for the alternative energy generation, energy storage and information technology markets. This stock has a very high short interest of 23.9% of its tradable float of 49 million shares.
From a technical perspective, ENER has been trading in a range between around $4.20 to $5.30 for the past couple of months. If you see this stock move above $5.30 a share, then it could be setting up to squeeze the shorts and move significantly higher if oil takes off.
Another heavily shorted name in the solar space is one of the biggest players,
, which is engaged in the manufacture and sale of solar modules with an advanced thin film semiconductor technology, and it designs, constructs and sells PV solar power systems.
First Solar is projected to grow per-share profits by 15% in 2011 and potentially over 20% for 2012. The stock currently trades at a cheap forward price-to-earnings of around 15.45. This means that the stock is getting almost no premium even though the company is the one of the leaders in the solar sector. First Solar also has a reasonably strong balance sheet, with about $580 million in net cash on the books.
The current short interest on First Solar stands at about 15.7% of the tradable float of around 55 million shares. Watch for this stock to break above the 50-day moving average of $136.55 a share to potentially set a short squeeze into action that could move the shares toward the next overhead resistance level at $142.40 a share.
To see more stocks that could move up off of higher oil prices, including
GT Solar International
( SOLR) and the
, check out the
portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
Follow Stockpickr on
and become a fan on
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.