3 oil stocks to avoid during this mega demand rally

I shorted oil last week and won. Yes, I know it sounds crazy how hot the prices have been. It’s because I was patient sitting on my thesis and I used a peak moment. Experts are now calling for a price of $150 a barrel of oil. It was the click that made me jump. I believe this is a temporary situation in oil stocks from rhetoric, not lasting facts.

Today I’m going to share the three oil stocks to avoid, but do your own homework. My goal is to help deter investors from pursuing blindly. I do not condone the short selling of stocks after the GameStop (NYSE:EMG) super-peak events.

I have a lot of problems with the whole concept of this demand crisis. We shouldn’t call it a crisis when it’s intentional. The United States can pump enough oil to meet our demands. I already pay over $5 a gallon in Southern California. I’m pretty sure that when this becomes the price in Central America, the White House will change its tune. I don’t think they want the nation to suffer from the money crunch due to skyrocketing gasoline prices. They would act to remove them. Over the weekend, the The EU has already started this conversation. Can they do this? Of course, the whole world accepts that this is a rigged market.

The United States has a large horde of reserves that it can release under political pressure. The Federal Reserve is in panic mode to fight inflation. Imagine what exorbitant energy prices will do to that. Oil prices out of control cause damage to the entire system. The stock market will also suffer as the Fed will have to be more aggressive. In this scenario, these three oil stocks to avoid will also fall, even if the commodity itself rises.

Experts outbid each other for the highest score

Financial market gurus try to compete with the oil price headlines. The calls range from $105 to $150 per barrel. We have already seen this film. I remember in 2013 when Goldman Sachs also asked for prices of $150. It peaked soon after and crashed 75%. If you count the pandemic debacle, the United States Petroleum Fund (NYSEARC:USO) actually went to -$35 snap.

Last Thursday, I stocked up on windbags and shorted the USO using options. The position had finite risk and offered a 50% return in just a few hours. I did it live in my trading room and others participated and won too. The three oil stocks to avoid do not evolve perfectly with the price of the barrel of the raw material. It’s my way so I don’t fight rhetoric. I’m bearish, but not stupid.

By definition, oil prices are a fantastic game. There is a cartel we call OPEC whose members strategize to manipulate prices and supply. I don’t play with cheaters, so I’ll use oil company stocks instead. Trading fundamentals and charts are an easier game. Oil prices have an influence, but not a 1 to 1 relationship. When I say “short”, I certainly don’t mean the traditional way. Selling shares that I do not own exposes me to unquantifiable risks.

My first rule of taking risks is to know the maximum damage potential. If I borrow stocks and resell them, I would blind myself to maximum pain. Instead, I use options where I can deploy strategies with finite risks. Some don’t even need a price drop to win. Either way, I would use stop losses in place for even more security.

Let’s come to the three oil stocks to avoid today:

  • Chevron (NYSE:CLC)
  • Exxon Mobil (NYSE:XOM)
  • SPDR Energy Select Sector Fund (NYSEARC:XLE)

Oil stocks to avoid: Chevron (CVX)

Source: Charts from TradingView

It is the most difficult of the three records of all time. The CVX stock shows no weakness and no signs of fading. I find this illogical in the context of the global green commitment. The whole world has already decided that they want to use less oil from now on.

The commitment in this area is so high that all car manufacturers have also set themselves the same goal. This alone means that energy consumption will forever lose 100 million customer vehicles per year. The process will take some time to happen, but it is happening.

I find it mind-boggling that CVX stock that deals with this stuff is breaking records. This is also when Wall Street stocks are in a correction phase. Shorting CVX is too risky. Options offer safer alternatives, but my call today is to avoid a potential pitfall by not pursuing so late. When the pandemic was underway, I shared optimistic thoughts about it and its competitors. But the stock price was half of what it is today. There was an obvious value for all, and now it’s the exact opposite. The yield was double what it is now.

The least investors can do is not fall into the experts’ trap. Resist the hunt for CVX even though it is the main oil stock to avoid now. Even as the rhetoric of runaway energy prices heats up, I must resist. They got it wrong last time, so buyer beware. I have nothing against the company, it is a financial monster and I would recommend later.

Exxon Mobil (XOM)

Oil stocks to avoid: Exxon Mobil (XOM) stock chart showing potential

Source: Charts from TradingView

XOM is basically almost identical to CVX. Therefore, I will not regurgitate the same rating issue that I have with him. It pays 5% dividends, which is certainly attractive. When I suggested buying the stock last, it was closer to 10%. Additionally, the title was in a deep sinkhole, so the threat of correction was missing.

Now, and from these high altitudes, XOM’s dividend reward won’t make up much for correction losses. Shrinking market capitalization if the stock falls quickly would swallow up that return and take seconds. The good thing about Exxon stock is that management has its full commitment to maintaining the dividend. AT&T (NYSE:J) investors were not so lucky, as their divvy there was not sacrosanct.

But for that purpose, there are now better options. As the 3M Company (NYSE:MMM) now also pays 5% and has a similar price to CVX. His fundamentals are also solid and he can be defensive in times of stress. I found it while doing my homework this weekend, so I thought I’d share it with you. Additionally, it fell near an earlier bounce level, so there is support below it. I’m sure you can find more.

Oil stocks to avoid: Energy Select Sector SPDR Fund (XLE)

Oil stocks to avoid: SPDR energy fund (XLE) stock chart shows potential

Source: Charts from TradingView

XLE stock now inherits about 44% of its value from our previous two stocks. XOM and CVX make up about half of that, so everything I’ve said about them applies here indirectly. Since the exchange-traded fund has many other stocks, it has a diffuse risk profile across the industry. This offers the XLE a somewhat diversified risk of making headlines.

In the past, I have preferred to invest in energy stocks. I’ve done it almost exclusively with our two giants today as the XLE. But today I even call to avoid chasing him too. There’s no rush to pile into a runaway meme this late in the game. My nightmare scenario is being the last person in a stockpile. I’d rather risk missing something than hold a losing sack for months. Those who chased the headlines in oil stocks nine years ago are still waiting for their bailout. I don’t think it was us who switched places with them.

Since the XLE doesn’t have its own financial metrics, I’ll touch on the technicalities. Charts are opinion agnostic, so they don’t lie or bias. The breakout may have started from $75 per share. The target could reach $112 per share. The drop below zero caused some distortion in the chart. As a result, the techniques can be a bit fuzzy. The fact that the value has turned negative should cause concern across the sector.

Oil investors must know and accept that there are strong cheats. Unless you think your skills are outstanding, chances are winning won’t be easy.

At the date of publication, Nicolas Chahine had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

Nicolas Chahine is the Managing Director of SellSpreads.com.

Steve R. Hansen