Oil Prices Headed Higher after this Week's Boost

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Oil prices have steadily inched upward, buoyed by a surprising drop in U.S. crude inventories, stronger than anticipated retail sales, and the heightening tensions in Iran.

Benchmark crude for September delivery rose $1.27 to finish at $95.60 per barrel in New York on Thursday. On the heels of the Commerce Department report Wednesday on retail sales, oil rose 90 cents, finishing at $94.33 a barrel, near three-month highs. Brent crude also rose, closing the day up 35 cents at $114.63.

Oil prices slipped a little Friday, but remained above $95 a barrel in morning trading. They fell on news that the Obama administration may release oil reserves to slow the oil price climb. Oil is up 23% since late June.

Behind the Oil Price Rise

Better-than-expected July retail sales, according to energy analyst Stephen Schork, gave oil a push upwards Wednesday.

Signals that Americans are opening their wallets more freely amplified expectations that demand for oil will increase. Government data revealed that Americans increased their retail spending in July by the most in five months.

"The data seems to have inspired a euro rally, which in turn has helped commodities, in particular oil, up a bit. Oil seems to be inspired by a steady technical trend to the upside," Tony Machacek, an oil futures broker at Jefferies Bache told Reuters.

Related: It's Impossible to Deny this Long-Term Oil Price Catalyst

On Thursday came reports that showed U.S. crude stockpiles shrunk by 3.7 million barrels last week to 366.2 million barrels, marking the third week in a row of large weekly decreases, according to Energy Department data. The forecast, according Platts, had been for a decline of 1.5 million barrels. The steep drop suggests stronger demand for fuel.

Also pushing oil higher are mounting anxieties over Iran's growing threat to choke the Strait of Hormuz, a vital oil route, as tensions heat up over Iran's nuclear program.

In less than two months, global crude oil benchmark prices have risen by more than a third.

"As long as it [oil] keeps focusing on the chances of war in the Middle East and the possibility of quantitative easing in the United States, this market will stay strong," Carsten Fritsch, a commodity analyst at Commerzbank in Frankfurt told Reuters.

Echoing that sentiment, JCB Energy in Vienna wrote this week in a report, "Intensifying supply jitters spooked the markets following news reports out of Israel indicating a rising possibility of military intervention in Iran. While the tone out of Israel has indeed become more aggressive, we still think Israel is unlikely to take unilateral military action against Iran. However, with U.S. elections only 12 weeks away, this could be a political move by Israel to pressure current U.S. administration to show its hand."

Oil Price Outlook

The outlook for the rest of the year, and into next year, is for $100 a barrel or better for oil.

The U.S. Energy Information Administration (EIA) projects the Brent crude oil spot price will hover around $103 a barrel over the second half of this year, roughly $3.50 per barrel higher than last month's outlook.

As of now EIA's outlook for 2013 oil prices is for an average $100 a barrel. The projected West Texas Intermediate (WTI) crude oil spot price discount to Brent crude oil will narrow from about $14 in the third quarter of 2012 to $9 by late 2013.

Due to higher crude oil prices, EIA has increased the average regular gasoline retail price for the third quarter of 2012 to $3.49, up from last's month's $3.39 outlook.

Trading the Upward Oil Price Trend

The fresh spate of reports revealing oil's upward trend highlights energy profit opportunities.

A couple of names worthy of a close look include:

  • Exxon Mobil Corp. (NYSE: XOM), the oil behemoth that sports a strong global presence and attractive 2.6% dividend yield.
  • Apache Corp. (Nasdaq: APA), the independent exploration is using the new technology of "enhanced oil recovery" that uses CO2 flooding, and is expected to dominate the next wave of crude production.
  • C&J Energy Services (Nasdaq: CJES), a leader in hydraulic fracking, a technology the energy industry is increasingly using to expand natural gas production as oil prices rise.

Phillips 66 (NYSE: PSX), an oil refiner recently spun off from ConocoPhillips (NYSE: COP) also looks attractive – so much so that Warren Buffett's Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) added more of the stock to the cache it received in the spinoff.

Phillips and oilfield equipment maker National Oilwell Varco (NYSE: NOV), another Buffett favorite, both boast robust operating margins and healthy balance sheets.

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