Slick Oil Opportunities

Enlarge Photo Slick Oil Opportunities

Fri, May 30 05:30 AM

Joshua Lipton, Forbes.com

Energy prices are notoriously volatile, but now they're moving in just one direction: up.

For a host of reasons, including strong demand, supply concerns, a lower dollar and the role of speculators, crude oil prices have skyrocketed--now topping $133 per barrel. Just a year ago, West Texas crude was costing around $65 per barrel.

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For investors, two questions need to be addressed. One, where does oil go from here? And two, where should stock market players put their money to capitalize on the action?

Forbes.com recently checked in with some market professionals to get answers. We asked these big-picture gurus where they thought the price of that black gold was headed. In addition, we wanted to find out how they're playing crude and where, exactly, they're investing in this runaway oil market.

One analyst with a lot of weight when it comes to oil predictions is Goldman Sachs oil analyst Arjun Murti. He's the analyst who predicted back in March 2005--when oil traded at around $50 a barrel--that the price would spike to $105 a barrel.

Now Murti thinks the price of oil could spike to $150 to $200 a barrel over the next six to 24 months. He says the core underlying drivers of the rise in oil prices remain firmly intact.

First, he writes, non-OPEC supply is struggling to grow, with notable declines being seen in Mexico, and Russia showing signs of rolling over following an extended period of rapid growth.

"Rising industry cost structures and disappointing production growth and reserve replacement suggest non-OPEC supply trends are unlikely to improve," Murti says.

Second, OPEC spare capacity remains at very low levels, and OPEC countries are facing downward pressure on net exports due to lackluster supply growth and sharply rising internal demand, Murti says.

"Saudi Arabia is starting to acknowledge that while it can likely increase production in the near-term, production is not going to grow infinitely into the future."

Third, the analyst notes that key oil-exporting countries, for the most part, continue to restrict foreign investment, which will likely keep a lid on how fast supply can grow.

Finally, he points out that demand growth outside the Organization of Economic Cooperation and Demand remains healthy--due, in part, to economic growth but also, more meaningfully, to recent widespread power problems that have led to burning diesel and gas oil fuel in portable generators.

Murti's favorites include ConocoPhillips, Cabot Oil & Gas, Halliburton and Valero Energy. His favorite pipeline is El Paso Corp..

Dan Rice, the longtime portfolio manager of BlackRock Global Resources, a fund that invests in global energy and natural resources companies, also says that $200 per barrel seems within reason.

"Let's say we run out of coal," Rice says. "Or we don't have enough to satisfy electricity demand worldwide. We are already starting to have problems. Prices have gone higher, signaling problems with coal availability."

So what happens if there isn't enough coal for the electricity providers?

"Two things happen," Rice says. "They burn more oil, in which case demand goes up, or you don't make the electricity, so you shut down industrial customers. You're screwed. Prices get to $200. That isn't pie in the sky thinking. It could happen. We haven't seen the tipping point yet. But most of the trends are in that direction." (See: "Loving Coal, Seeing No Bubbles.")

Not everyone agrees that $200 is a done deal, however.

Longtime market pro Ed Yardeni thinks $200 oil is unlikely, since slowing economic activity around the globe means decreased demand for oil. Yardeni wrote in a recent note that it would take a fairly serious supply disruption triggered by a geopolitical crisis to drive prices up to $200 a barrel.

"Admittedly, there is one in the works as tensions mount between the U.S. and Iran," Yardeni writes.

The questions for investors, though, are how to play oil and when is the right time to carve out some significant positions.

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