3 Oil Stocks That Could Rally In 2017

Crude oil prices have roughly doubled from their 12-year lows in February, and recently hit 18-month highs in the wake of the presidential election and OPEC's decision to implement production cuts. And while the technical and sentiment signals for crude may be mixed at the moment, three oil stocks could extend their recent runs higher in 2017 -- President-elect Trump's first year in office -- if recent history is any indicator: Pioneer Natural Resources (NYSE:PXD), Southwestern Energy Company (NYSE:SWN), and Chesapeake Energy Corporation (NYSE:CHK).

In the wake of crude's recent run, "large speculators" now hold a record-high net long position on oil, as you can see in the Commitment of Traders (COT) chart below. As founder and CEO Bernie Schaeffer noted in this month's Option Advisor commentary, the last time this crop of speculators were even close to this bullish was June 2014, just before oil went on to plunge more than 50% in the subsequent six months. But, as alluded to earlier, sentiment toward oil is mixed; recent financial media headlines like "Get Ready for the Great Oil Bust of 2017" suggest not everyone has bought in.

COT "Large Speculators" -- Net Long Oil Positions

So, while it may be difficult to get a contrarian read on oil futures, recent history indicates that energy stocks PXD, SWN and CHK could enjoy some upside over the next 12 months. During the first year of the past three presidential cycles (2005, 2009, and 2013), this trio has been among the 25 best-performing S&P 500 Index (SPX) stocks, per data from Schaeffer's Senior Quantitative Analyst Rocky White. In fact, all three equities ended all three of those years in the black, even though first years of presidential cycles tend toward stock market weakness. 

PXD averaged an impressive annual gain of 105.5% during the aforementioned three years. More recently, the stock nearly doubled from its January 2016 low to its two-year peak of $194.86 in December, and the shares are now lingering in the $184.50 area, which marks a 61.8% Fibonacci retracement of PXD's drop from mid-2014 to early 2016.

Although absolute options volume is light, data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) suggests a bigger-than-usual put bias among option buyers. Specifically, 50-day ratio of 1.13 is higher than 68% of all other readings from the past year. While some of this activity could be PXD shareholders seeking an options hedge, an exodus of lingering "vanilla" bears could be a boon for the stock.

SWN averaged a gain of 89.2% during the first year of the past three presidential cycles. While the shares have more than doubled since their February 2016 lows, SWN has underperformed its peers over the past three months, giving up more than 26%. In early December, just after the aforementioned OPEC pledge, the stock attempted to erase its losses stemming from a late-October earnings miss, but backed down from its 160-day moving average in the formerly supportive $12.50-$13 neighborhood.

If history repeats for SWN and the stock outperforms during the first year of this presidential cycle, there's plenty of skepticism available to unwind. The stock's 10-day ISE/CBOE/PHLX put/call volume ratio of 2.45 is higher than 91% of all others from the past 12 months, pointing to accelerated put buying in the past two weeks. Meanwhile, just four out of 23 analysts offer up "buy" or better endorsements.

CHK averaged a return of 71.9% during the first year of the past three presidential cycles. The stock ended up being one of the biggest immediate beneficiaries of the Trump election, and while it has struggled to overtake the $8 region over the past few months, is still up a whopping 367% since its multi-year low of $1.50 in February.

Option traders have taken notice, as evidenced by CHK's 10-day call/put volume ratio of 9.61 -- just 1 percentage point from an annual bullish peak. Near-term traders are getting a relative bargain, to boot, as CHK's Schaeffer's Volatility Index (SVI) of 54% is in just the 4th percentile of its annual range. Plus, the stock's Schaeffer's Volatility Scorecard (SVS) of 80 indicates that CHK has tended to make outsized moves over the past year, relative to what the options market has priced in.

There's still plenty of room on CHK's bullish bandwagon, though. Analysts remain stubborn, with just four of 22 deeming the stock worthy of a "buy" or better endorsement. Plus, short interest still represents a healthy 15.4% of CHK's total float. A round of upgrades or short covering could help propel CHK even higher.

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