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Tickers in this Article: USO, XOM, COP, CVX, PWE, KWK
The commodity boom has been ever present in the markets, and the headline nearly every day is record crude prices. The sight of crude camping out around $130 per barrel is at the same time amazing and frightening. Either way the important thing is to look at the plays in this market. And with an abundance of energy plays, if you want to get involved which are the right ones?

Three Scenarios
With a huge rise in any sector of the market, the first question you should ask when investing is: Am I entering at the peak? The outlook for oil prices is anyone's guess. Look in the financial news and you'll see anything from people claiming that prices will plummet to some screaming $200 oil! The first thing to do is to look at these scenarios.

1) Oil will plummet
The thesis for this attitude is that oil has about doubled from a year ago and a lot of this is due to the evil exchange-traded funds (ETFs) that have been spurring speculation. Fairly young ETFs like U.S. Oil Fund (AMEX:USO) have been driving the speculation in the commodity and have artificially driven up the price. I don't believe this is the case. Speculation certainly has played some role in the price of oil, but the majority of the price swing has been driven by a tight demand/supply market for oil. Demand has not shifted dramatically, despite the run up in price, which shows that the price is sustainable at this level. This could change and I think we will start to see some shifts in oil demand, but it will still take awhile to shift dramatically. (For more on the energy sector ETFs, read ETFs Provide Easy Access To Energy Commodities.)

2) Oil will rise to $200
It may sound crazy, especially with the huge rise already, but it is coming from the mouths of experts at Goldman Sachs. For that reason I wouldn't take it lightly. I don't think this is the most likely scenario, but it is certainly a possibility. With fundamentals still in place for oil, I think this is more likely than a price retreat.

3) Oil will stay put
A few years back oil saw a big run from $35 to $70, and all of the discussion was the same. What happened was that we saw a long period of oil trading around that price. I think that is what will happen here. That doesn't mean it won't trade away from $130, and $130 may not even be the right midpoint. We could see a range of something like $120-140 for year or two, without dramatic changes in the market.

What to do?
I see the last two scenarios as the most plausible, and so the play is to still have some of your portfolio in oil. I would not recommend buying oil futures, since those can burn you, but several stocks will add some support to you portfolio in the face of high oil. The first names are the big ones: Exxon Mobil (NYSE:XOM), Conoco Phillips (NYSE:COP) and Chevron (NYSE:CVX). The problem with these stocks is that they get squeezed significantly as oil rises. They benefit and get squeezed. A doubling in oil does not mean doubling in these stocks. The benefit is that they are somewhat more stable than other energy plays, and even if oil drops to $100 per barrel they will still be making big profits. Of these I think Chevron is the most attractively valued and has been making investments in new areas such as oil shale.

There are a plethora of lesser known oil plays. Let's look at two that recently been on my radar screen. The first is Penn West Energy Trust (NYSE:PWE). This is a Canadian based energy trust that invests in, acquires and develops oil and natural gas projects. The price is even with where it was a year ago, but it doles out a 12% forward annual dividend yield, which is attractive in this market. The other is Quicksilver Resources (NYSE:KWK), which has seen growth right up with the likes of crude oil through the past year, but still trades at 12-times earnings. This company is involved in oil and natural gas, and develops shale oil projects, which are obviously very attractive with oil levels where they are.

The Bottom Line
You don't want your entire portfolio in oil sensitive stocks, but to be diversified, you definitely want a piece. High oil is affecting almost every company in the market, usually in a negative way, so buy one or two stocks that will benefit. I think oil prices will remain high for next few years, so the stocks above will benefit. Take advantage of it, by having a little exposure.

To learn about the issue, read Peak Oil: Problems And Possibilities.

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