We’ve been bullish on oil and energy stocks for more than two years now, dating back to April of 2016. In January of this year, we pounded the table yet again for energy stocks. And in April of this year, we pounded the table even harder for why “Energy Stocks Still Look Great.”

Well, we’re not done pounding yet because the bullish oil and energy stocks call is one of the best we’ve ever made… and the biggest profits are likely yet to come.

Energy stocks are possibly the best place to be in markets right now – with a focus on a single industry in particular. More on that in a moment. But first, why are energy stocks doing so well?

First and foremost, energy stocks are doing well because oil prices are climbing to multi-year highs. West Texas Intermediate Crude, the benchmark for US oil prices, recently closed above $70 per barrel for the first time since 2014.

And $70 per barrel could just be the start. Giant commodity funds and well-connected oil traders are betting heavily that oil could rise above $80 per barrel.

And even that might be just the beginning. A new research report from Bank of America Corp says oil prices could hit $100 a barrel in the next eighteen months.

And then there is Pierre Andurand, one of the best-known oil traders in the world (and manager of a billion-dollar oil-focused hedge fund). Andurand has said $300 per barrel oil is “not impossible” in the next few years in the event of a perfect demand storm amidst reduced supply due to cost-cutting.

And where is most of today’s crude oil bullishness coming from? The Middle East.

With Iran now facing the pain of harsh new US sanctions, and the Iran deal dead, the urgent question being asked at the CIA and the Pentagon is: “How fast can Iran build a nuclear bomb?”

Intelligence estimates of how quickly Iran could “go nuclear” range from a few years out to less than twelve months. Remember too that North Korea ramped up faster than Western intel analysts expected.

Meanwhile the sworn enemy of Iran is Saudi Arabia. Few countries in the history of the world have hated each other the way Saudi Arabia and Iran hate each other. And the foreign minister of Saudi Arabia, Adel al-Jubeir, has told CNN that if Iran builds a nuclear weapon, the Saudis will build one too.

“We will do whatever it takes to protect our people,” al-Jubeir told CNN. “We have made it clear that if Iran acquires a nuclear capability, we will do everything we can to do the same.”

So the Middle East is a powder keg with a potentially lit fuse. And we haven’t mentioned Syria, where Israel just launched a major military counterstrike against Iranian targets based in the country.

In fact, there are so many interlocking conflicts and overlapping hostilities in the Middle East right now, the complexity reminds some analysts of the conditions that led to World War I in 1914. The Middle East “fear premium” for oil is back and here to stay.

Then too you’ve got a backdrop of OPEC cutting back aggressively on production, surplus crude oil stockpiles running low, and Venezuela facing an oil production drop-off that could be worse than Iran’s.

This is not good news for the world. But it is fantastic news for US oil producers.

Citigroup analysts have predicted the United States could become the world’s top oil exporter in 2019. Texas oil production has climbed to an all-time high. A two-million-barrel supertanker recently arrived at a Texas port for the first time (to export US crude). And the US government has reached out to American oil producers about ways to increase supply (to offset a loss of production via the new Iran sanctions).

The really big winners here are the US shale producers and the exploration and production industry as a whole. It wasn’t so long ago that US producers were struggling to break even with crude oil prices down in the dumps. Now those same producers are looking at a potential gusher of oil profits that may keep getting bigger and could potentially last for years.

Investors have caught on to this dynamic. They are bidding up the price of energy stocks, which is no surprise as we’ve been bullish on the space for a while.

But the big run for exploration and production companies could just be getting started. In particular we like XOP, the S&P Oil & Gas Exploration & Production ETF. Unlike XLE, the SPDR Energy Sector ETF that is market-cap weighted, XOP takes a modified equal-weight approach. The smaller companies have the same effect on the ETF as the larger companies.

As you can see from the chart below, XOP is pushing to new recent highs. XOP has broken through resistance in the $40 area, and if this new uptrend builds momentum, could target its old highs of $80 made in mid-2014.

XOP, the S&P Oil & Gas Exploration & Production ETF, pushing to new heights
The XOP price action also confirms the power of our new service, Ideas by TradeSmith. The current VQ for XOP is about 9% higher than the average VQ as of mid-2017, a bullish sign (and one of the signals we look for in Ideas by TradeSmith).

Meanwhile if you look at the top ten holdings of XOP as shown below, you can see that seven out of ten are in the green zone, showing broad strength in what has been an overall wobbly market.

XOP's top ten holdings

To sum this all up, the supply and demand picture looks incredibly bullish for oil prices right now with Middle East tensions powering the bull trend.

The major beneficiaries from this are the US-based oil producers, and one of the best ways to gain exposure is XOP. For our big multi-year call on oil and energy stocks, the best may be yet to come.