Two Small-Cap Oil Explorers Ready To Rally…

| August 20, 2014 | 0 Comments

oil drillingAnyone watching small-cap oil and gas stocks over the past two months knows it has been a rather rough ride. With the price of West Texas Intermediate (WTI) plummeting from $106 to $96 since mid-June, investors were quick to decrease exposure to the oil industry.

Of course, the summer downturn in natural gas didn’t help matters either.

Thanks to declining energy prices, the SPDR S&P Oil and Gas Exploration & Production ETF (XOP) fell 11% over the past two months. As you may know, XOP is filled with a mixture of small- and mid-cap oil and gas explorers.

Let me show you a chart…


Clearly, XOP had a very bullish start to 2014. The energy ETF rose 27% between early February and mid-June. But as you can see, XOP has retracted sharply since mid-June. The downturn comes at the same time energy commodities were overtaken by bearish sentiment.

Now, take a close look at the green line…

Investors have used this important technical uptrend line as a buy point three times over the past two years (red circles). Each time they did they were rewarded with hefty gains. As you can see, XOP is drawing closer to this pivotal price area once again.

Will an upturn happen again this time around?

Given the fact oil and natural gas are deeply oversold, the odds favor a bounce for the commodities in coming months. When they do turn higher, it’s highly likely XOP follows suit.

How do you capitalize on this potential rebound?

Obviously, the easiest way is to just buy XOP. But if ETFs aren’t your thing, I have another way to capture small-cap energy gains.

You see, two of the top holdings in XOP are VAALCO Energy (EGY) and Emerald Oil (EOX). Both companies have a market cap of around $500 million and a sub-$10 share price.

And get this…

In spite of the recent downturn in XOP and the rest of the small-cap energy space, EGY and EOX are higher over the past month.

In fact, EGY is up nearly 20% since July 19th while EOX is up just over 6%.

This strong performance in the face of declining commodity prices speaks volumes as to how investors feel about these companies. If oil and natural gas rebound like I think they will, EGY and EOX will not only seek out additional gains, but they’ll likely outperform XOP in the process.

Bottom line…

The small cap energy space has been beaten down over the past two months. But with oil and natural gas trading near technical support, it’s likely we get a bounce out of these commodities soon.

As a result, EGY, EOX, and XOP are all poised for higher prices.

Until Next Time,

Justin Bennett

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Category: Crude Oil, Energy

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.