This Oil Rally Could Have Much Further to Go

For more than a week now, West Texas Intermediate (WTI) crude oil has been trading north of $70 per barrel, a level we haven’t seen since November 2014. Gas prices are likewise trending up, as I’m sure you’ve noticed. According to the American Automobile Association (AAA), the average cost for a gallon of regular gas was $2.88 on May 15, up nearly 25 percent from a year ago.

This will inevitably push inflation up even higher. In April, consumer prices advanced 2.4 percent year-over-year, their fastest pace since February 2017.

Energy the Best Performing Sector for the Three-Month Period

The good news is that energy stocks are also recovering. The S&P 500 Energy Index, which tracks heavy hitters such as Chevron, Exxon Mobil, Marathon Petroleum and more, is up almost 7 percent year-to-date, and 46 percent since its low in January 2016. As of May 15, energy was the top-performing sector for the three-month period, returning 14.5 percent.

energy stocks are recovering alongside oil prices
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Those returns could grow even more, if Bank of America Merrill Lynch’s latest forecast proves accurate. Analysts there believe the price of oil could climb back up to the $100 range as early as next year, which would add another $1 to the cost of a gallon of gas.

Speaking to CNBC this week, famed energy analyst Dan Yergin, winner of the Pulitzer Prize, said that Brent crude, the international oil benchmark, could reach $85 a barrel by July. This would serve as a “big stimulus” for U.S. drilling activity, he noted. I would add energy share prices to that assessment.

2018 gas prices higher than previous three years
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U.S. gas prices peaked at $4.11 a gallon in July 2008, according to AAA, and if you’re like me, you’re probably in denial that we might have to start paying that again at the pump. We’re not quite there yet, but it might be time to get your portfolio ready by adding to your energy exposure.