Oil is in contango for the first time since 2021: Best oil stocks

Key Points

• All the fundamental factors point to a potential new rally in oil; Goldman says it could go as high as $100 per barrel this year.
• Traders are hopping on this view by throwing oil futures into contango, which is lingo for being bullish.
• These stocks and a hedge could be the best bets to play out the economic gain that will be made from more expensive oil.

The days of open outcry commodity trading are nearly extinct, as most of today's trading takes place behind a desk and through online brokerages. However, the traders that ascended from these pits took with them some of the same principles that they learned at places like Chicago, where most options and futures trade.

The main strategies carried away from the pits are spreads - or curves - between different futures contracts across dates. Regarding oil futures, there are two primary states that futures can fall upon: Contango and backwardation. The former is bullish, and the latter is bearish.

When in contango, oil futures reflect traders' views that oil prices could be on the rise for the following months or quarters, which is good if you are looking for exposure to energy stocks since this condition hasn't been here since 2021. The first stocks to get paid are names like Helmerich & Payne NYSE: HP and Transocean NYSE: RIG, but more on that later.

A new shift 

The house view at Wall Street is definitely turning optimistic on the United States economy, which is suitable for oil. Considering that the services sector is the only space that has been pushing the country's GDP forward, the possibility of manufacturing getting back on the wheel could prove to be a significant catalyst for oil to rise.

Analysts at The Goldman Sachs Group NYSE: GS have rolled out their projections for 2024. One of the main themes includes a potential breakout in the United States manufacturing sector. This move would be directly sponsored by the FED's new path to possible interest rate cuts coming this year.

Now, if money becomes cheaper due to interest rate cuts, the dollar index could take a dive. A lower dollar index would make American exports more attractive for foreign buyers, which is a direct injection of activity into manufacturing.

Manufacturing, transportation, and raw materials themselves often require oil. Because these factors are all aligned with the bullish case for oil, the same analysts at Goldman also put out their own house view for oil prices in 2024. The range the bank sets is between $70 and $100 a barrel.

You can follow the Energy Select Sector SPDR Fund NYSEARCA: XLE and its performance against the broader S&P 500 index. There is a gap of underperformance as significant as 29.2% over the past twelve months, which leaves a lot of room for the energy sector to catch up to the rest of the market, and this could be the time to start preparing your portfolio.

The best bets 

How about some oil protection before you get too excited about oil exposure? Because higher oil prices are bearish for airline stocks, you can hedge away the risk of oil not moving higher but rather staying at the lower end of Goldman's predictions.

Rather than concentrating your capital on one single airline, you can consider the U.S. Global Jets ETF NYSEARCA: JETS as a broader way to diversify your hedge. The best traders worry about their downside first, and now that you have a way to cover it, it is time for the good stuff.

Before the big oil producers like Chevron NYSE: CVX and Exxon Mobil NYSE: XOM begin to see the profits of selling more expensive oil, they need to get the machinery and equipment to drill and refine the petroleum they need to sell right? Here is why stocks like Helmerich and Transocean are a good target.

Business models in these stocks are driven by lease and sales contracts on rig and drill equipment, and these contracts are entirely dependent on the price of oil at the time. This means that if oil is set to advance higher, these stocks will be the first to see the economic benefit of the commodity.

This may be why analysts have set a price target of $8.8 a share for the stock, implying a 60.6% upside from today's prices. More than that, these same analysts are projecting a more than 100% growth in earnings per share for the next twelve months.

Regarding Helmerich, analysts are on the same bandwagon with their $41.8 a share price targets, also reelecting a 25.1% potential rally from where the stock is trading today. Suppose this double-digit upside is not enough for you. In that case, the stock also offers shareholders a 3.0% dividend yield to beat inflation and compete with government bonds.