The Energy Department says the price of oil will average about $93 a barrel this year which could put gasoline prices at or near $4 a gallon and there’s not much we can do about it. Or is there? Actually, there may be one way to get some of that money back by investing in rising oil prices. The trick is to be sure those prices will continue to rise.
Brian Hicks, co-manager of U.S. Global Investors Global Resources Fund says he’s expecting strong economic growth, and that's always the No. 1 driver for crude oil. And Ben Baden, writing for U.S. News and World Report says there are a number of factors contributing to Hicks's expectation of higher gas prices.
Baden quotes Hicks as saying that despite record levels of investment into crude oil production, we haven't seen a significant increase of non-OPEC crude oil production, so that gives OPEC stronger market share and stronger control of the market, and it implies prices will be going up. He adds that new oil supplies are coming from higher-cost areas like deep water drilling, which will also push prices higher.
According to Baden, demand for oil is only going up. This month, the U.S. Department of Energy raised its outlook for global oil consumption to a record-high 88 million barrels a day in 2011. Most of that growing demand says Baden is expected to come from the emerging markets countries like China and India.
Craig Hodges, co-manager of the Hodges Funds, says oil will fluctuate between $90 and $100 this year. But he believes the real spike will come in 2012 when prices are estimated to average about $97, about $2 short of the record high in 2008.
When it comes to investing in oil, investors have a few options, says Baden, including investing directly in the spot price of oil through exchange-traded funds or in the stocks of oil-related service and drilling companies.
Meanwhile, Hicks says he's invested in Texas names like drilling company Pioneer Natural Resources, and also globally in producers like Apache, which has operations in North America as well as Egypt and Australia. He also likes big oil equipment and services names like Halliburton. For investors who don't mind taking on a little extra risk, Hicks favors investments in oil companies in Colombia like small-cap name Gran Tierra Energy.
Out of favor
Hodges says investors should look to areas that are out of favor, such as deep-water drilling companies in the wake of the BP oil spill in the Gulf of Mexico. He likes Transocean, even though it was involved in the spill, along with Atwood Oceanics, a small-cap driller with global operations.
Baden says that besides individual stocks, there are a number of oil-related ETFs for investors. ETFs have revolutionized the way investors can gain exposure to commodities in their portfolios. But of all commodities, oil is still one of the most difficult to invest in directly. If you want to invest directly in oil, you must invest in an ETF that tracks a basket of futures contracts.
Tom Lydon, editor of ETFTrends.com, recommends United States Oil ETF and PowerShares DB Oil. Both track a basket of futures contracts that follow the price of oil. Investors can use these funds to hedge against the prospect of oil prices rising, or if they simply believe oil is heading higher.
According to Baden, it's important to note that these funds won't move dollar-for-dollar with the price of oil because investors have to pay a premium to invest in futures contracts. In a recent report, Morningstar analyst Abraham Bailin wrote: "Predicting oil prices is an extremely difficult task that should be approached with caution or, some may argue, avoided altogether."
For the less sophisticated investor, Lydon recommends ETFs that simply track indexes of oil production and services companies, such as iShares Dow Jones U.S. Oil & Gas Exploration & Production ETF, PowerShares Dynamic Oil & Gas Services , and SPDR S&P Oil & Gas Equipment & Services ETF. These ETFs invest in a handful of companies like Halliburton, Schlumberger, and Transocean.
