It’s been a good year for stocks. The S & P 500 is up more than 9% year to date. It’s been a better year for energy stocks. The Energy Select Sector SPDR Fund (XLE) , which is made up of S & P 500 companies that develop or produce energy products, is up almost 17%. The move higher for energy stocks comes as West Texas Intermediate crude oil approaches the mid-2022 highs of $88.31 per barrel. Brent , while still well below its 2022 highs of $127.98, appears poised to test the late 2023 highs of $96.55 per barrel. Theoretically, one can make bullish bets on oil using an ETF, such as the United States Oil Fund (USO) . However, I would caution against using this as an investment vehicle to make a long-term bullish bet on oil. The reason for this is that there is generally a “roll-cost,” as the underlying fund must continuously adjust or “roll” near-term oil futures contracts to longer-dated ones. Consequently, USO will not replicate the price of spot precisely and performance will be dragged down over time. So, while it can be used to speculate on short-term price action in the commodity for those who cannot access the futures market, it is wiser to make longer-term investments in companies in the sector or a specific industry within that sector. SPR decline As the chart below illustrates, the country’s Strategic Petroleum Reserve declined sharply in the lead-up to the 2022 midterm elections – keeping oil prices in check. As the 2024 general election looms, investors might be concerned the Biden administration could once again access the reserves to put a cap on prices. While oil prices were somewhat kept in check in mid-2022, and the XLE did fall more than 25% between the May highs and mid-July of that year, further depleting the SPR to put a lid on crude can only work for as long as there are reserves to sell. To get exposure to the oil services industry, one could purchase Halliburton or Schlumberger . For the integrated oil companies, Kinder Morgan is a solid midstream pipeline company. For oil refining, one could choose a company such as Valero or Marathon Petroleum . Both of these have been on a tear. Chasing them here, even though summer approaches and gasoline demand should peak soon, is a bit nerve-wracking. In their defense, this is a strong period for gasoline demand. On top of that, the crack spread — the difference between the price of a barrel of crude oil and the prices of the products it is refined into has also expanded recently. Both…
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