Are You Ready For An Oil Spike? Here's How To Invest Now


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In case you couldn't tell from the gasoline prices in your area, oil prices have been on the move. The chart below pretty much says it all.

As you can see, benchmark West Texas Intermediate Crude has seen substantial price action. For the record, prices have staged an impressive 120% bounce off the lows from January 2009.

There are compelling reasons to believe these elevated prices might stick around for a while. That could act as an economic drag, siphoning money from consumers and sparking inflationary price hikes for goods and services.

The United States alone consumes 18.9 million barrels of oil every day, rain or shine. And China's appetite grows more ravenous by the minute, with daily consumption doubling from 5.5 million barrels in 2003 to nearly 9.8 million in 2011.

Aside from a brief downturn during the recession, global oil consumption is moving inexorably higher.

As you can see, worldwide oil consumption passed its pre-recession 2007 peak in 2010 and continues to rise. It is projected to

 reach 90.2 million barrels per day this year. Meanwhile, the world's oil companies will only produce 90 million barrels per day.

In other words, demand will outstrip supply by 200,000 barrels per day, or about 73 million barrels for the year.

We can barely feed our appetite today. And we're getting hungrier. Per-capita consumption in China and India is still less than one-tenth that of the United States. But they're catching up fast. In fact, 18 million new cars hit the road in China last year, compared with 14.5 million in the United States. That's stretching supplies even thinner.

Meanwhile, most production grounds have been in a steady decline for decades. Future oil exploration activity will be focused in deep offshore basins, which are expensive to tap (meaning drilling and production will halt if prices retreat and recovery becomes uneconomical).

And if all that weren't enough, the Federal Reserve's quantitative easing and other dollar debasement policies have given a huge boost to oil and other dollar-denominated assets.

In short, there are plenty of factors underpinning high crude prices. And I think they are headed even higher. 

But even if oil stabilizes at this level, we could still see blowout profits for many companies -- enough to buy back shares, raise dividends, and plow surplus cash into expansion projects to support future growth.

There will be many beneficiaries: offshore drillers, equipment and service providers, even the alternative energy sector (which always attracts interest when high oil prices become oppressive).

But most of the wealth will go to the companies pulling the stuff out of the ground. Still, you can't just invest blindly.

Some companies may have already locked in most of their production at lower prices through hedging. Those companies won't feel the full impact of the tailwind. And integrated giants like Exxon Mobil ( XOM ) won't yield the greatest returns either, because high oil prices typically crimp refining profits.

Instead, look for smaller companies with no distractions and a nimble earnings needle. Small energy producers are by far the easiest way to make money on energy stocks. If oil eventually shoots higher, as I think it will, you'll be glad you did.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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This article appears in: Investing , Commodities

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