OTCPicks Penny Stock Blog

We think the answer is YES! There are many reasons to get bullish on oil and, even more so, oil stocks. One is the fact that many indicators are beginning to suggest an economic recovery could be in the cards over the next several months. The three largest consumers of oil including the United States, the European Union and China should start to see things stabilize and by the Q3 or Q4 of this year their economies should start to recover. This recovery will bring the world's economic engine back to life and oil consumption should start to increase again.

But while the price of oil has risen from the $30s to $50, oil stocks have not really rallied much. Below we highlight the ratio of oil stocks (S&P 500 Oil & Gas index) to oil (the commodity). When the line is rising, oil stocks are outperforming oil, and vice versa for a declining line. As shown below, when oil spiked in early 2008, the ratio dropped to its lowest level in years. Then when oil tanked in late 2008, the ratio spiked to its highest level in years as oil stocks held up much better. Recently, however, oil has rallied and oil stocks have been stagnant, causing the ratio to come back down. At the moment, the ratio is resting just above the average since 1990.

We feel the breakout that occurred in early 2009, and the current stabilization just above the 20 year average suggest oil stocks may once again outperform the price of the commodity.

In interviews with more than a dozen small-, mid- and large-cap portfolio managers, most said they were taking the initial months of 2009 to increase their exposure to energy stocks. Largely thanks to the spending spree currently ongoing in Washington, these managers expect all that cash to create an inflationary environment for energy prices down the road.

Initially, they've been right. Even though prices have stabilized around $50 a barrel lately, crude oil is up nearly 50% in the past two months, giving a boost to shares of large oil companies on an absolute basis. For instance, shares of Valero Energy Corp. (VLO) are up 33% since the first week of March, while those of Marathon Oil Corp. (MRO) have gained 40%.

Lastly, Texas oil billionaire T. Boone Pickens recently reiterated his prediction that crude oil prices would hit $75 a barrel this year as producers scale back production. Pickens said about OPEC producers: "They told you they want $75 by the end of the year, I would count on that, I believe them."

OPEC has already begun to scale back output to help support crude prices, which have dropped from record highs over $147 a barrel in July to around $48 a barrel currently.

While we generally agree with T-Boon’s projection of $75 oil by the end f the year, the chart above suggests that the oil stocks may very well outperform the commodity on a relative basis.

Below are a few oil stocks that we feel members should research and put on their radars right away:

Adventure Energy (ADVE) is an independent oil and natural gas company engaged in exploration, development and production activities in the Appalachian Basin, particularly in Morgan County, Kentucky and Wayne County, West Virginia.

Transocean Ltd. (RIG) provides offshore contract drilling services for oil and gas wells worldwide. The company offers deepwater and harsh environment drilling, oil and gas drilling management, and drilling engineering and project management services, as well as explores, develops, and produces oil and gas resources

Valero Energy (VLO) operates as a crude oil refining and marketing company. The company operates through two segments, Refining and Retail

Marathon Oil Corp. (MRO) through its subsidiaries engages in the exploration, refining, marketing, and transportation of liquid hydrocarbons, natural gas, and other petroleum products worldwide. It operates in four segments: Exploration and Production; Oil Sands Mining; Refining, Marketing, and Transportation; and Integrated Gas

Endeavour Intl Corp. (END) is an independent oil and gas company, engages in the acquisition, exploration, and development of energy reserves in the United Kingdom and Norway sectors of the North Sea and the United States

RPC INC (RES) is an oil and gas services company that provides various oilfield services and equipment to the oil and gas companies. It operates in two segments, Technical Services and Support Services. The Technical Services segment offers pressure pumping, coiled tubing, snubbing, nitrogen pumping, well control consulting and firefighting, wire line, and fluid pumping services.

Chevron (CVX) This is one of the best consolidated oil companies out there that has solid refinery exposure. The company also has a strong balance sheet with a good dividend yield.

Whiting Petroleum Corporation (WLL) is an independent oil and gas company that acquires, exploits, develops and explores for crude oil, natural gas and natural gas liquids primarily in the Permian Basin, Rocky Mountains, Mid-Continent, Gulf Coast and Michigan regions of the United States.

BP Plc (BP) oil company is one of the highest dividend yield stocks around. When the market is down you can pick up the bp stock with dividend yeilds around 8%. That is one of the best dividend stocks around.

Exxon Mobil Corp (XOM) is the world's largest integrated oil company with perhaps the biggest divident yield.

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