$100 Oil Sparks Energy Investment Interest

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Civil unrest in the Middle East continues to push oil prices higher as companies with Libyan operations shut down production, threatening oil exports to Europe.

Crude oil futures on Wednesday hit the $100 a barrel level on the New York Mercantile Exchange (NYMEX) for the first time since September 2008. The April contract was as high as $100.91 in pre-market trading yesterday (Thursday).

Prices are even higher in Europe as its market is much more sensitive to Libyan oil export disruption. April Brent crude futures contract rose $2.45, or 2.2%, to $113.75 a barrel yesterday and hit an intraday high of $119.79, the highest level since mid-2008.

Volatility and uncertainty are driving both prices up, according to Money Morning Contributing Editor Dr. Kent Moors, a noted energy expert and editor of the Oil and Energy Investor.

"The Brent is far more sensitive to what's occurring in the Middle East than the [West Texas Intermediate] WTI in New York," Moors said in a FoxBusiness interview Wednesday. "The Brent also is more widely traded internationally than WTI is. So the end result is whenever you get an uncertainty situation like the one we currently have, Brent is going to be spiking further."

Paolo Scaroni, chief executive officer of Italian oil company Eni S.p.A (NYSE ADR: E) told Reuters the Libyan turmoil had slashed the country's oil exports by 75%, or 1.2 million barrels a day. And Spanish energy giant Repsol YPF S.A. (NYSE ADR: REP) said yesterday that production in the Libyan oil fields in which it has operations is just above 50% of capacity.

With Libyan leader Moammar Gadhafi threatening to interfere in the country's oil and energy infrastructure, prices worldwide could skyrocket.

"If he would actually do that, with 80% of the Libyan oil going directly to Europe, we'd be looking at a price somewhere between $125 to $130 virtually overnight," said Moors.
"The impact it'll have broader, in terms of the global market, is that uncertainty factor would takeover, the risk calculations would be considerably increased, and we'd have a situation where we're probably looking at $105 to $110 in the United States almost immediately."

If European refiners have to start buying sweet crude oil from other exporting countries like Algeria or Nigeria, that will cut into sweet crude supply that is usually shipped to the United States. American gas prices could then go higher than the recent national average of $3.19 per gallon.

Oil prices are up 7.35% since the start of 2011, and gasoline futures are up 10.67%. And the oil price climb is expected to continue for years regardless of the Middle East turmoil.

"We expect oil prices to follow an upward trend until the middle of the current decade, with lower spare capacity over time resulting in a greater sensitivity to geopolitical trends," Barclays PLC (NYSE ADR: BCS) analysts wrote in a report released Wednesday.

Readers have been asking Money Morning how to play higher oil prices, especially when increasing prices at the pump will hit consumers' wallets. The following reader comment addresses the trend and asks how to play it for profit.

Gas prices are taking off, and are predicted to climb substantially over the next several months because of rising oil prices. In the past this has always led to significant earnings increases for the oil companies.

I would like to see some specific recommendations of potential investments which will likely take advantage of this trend with accelerated stock price increases over the next several months to a year or two. I am talking about individual issues and any other related opportunities.

--Harry C.

While some oil companies are facing setbacks due to operational disruption in the Middle East, many energy-related companies are poised to prosper.

Money Morning Contributing Writer Jon D. Markman said U.S. refiners are already benefiting from the price gap between the Brent price of oil and the WTI price.

"Up to now the small-cap refiners based in the Midwest and Southwest like Holly Corp. (NYSE: HOC), Western Refining Inc. (NYSE: WNR), Frontier Oil Corp. (NYSE: FTO) and CVR Energy Inc. (NYSE: CVI) have benefited most from this differential because knowledgeable investors know that these companies have the most operating leverage," said Markman. "But once this move registers with managers of the larger funds, the attention moves to larger refiners such as Valero Energy Corp. (NYSE: VLO) and Tesoro Corp. (NYSE: TSO). The whole group has logged gains of 20% to 60% over the past month, and 75% to 200% over the past five months."

Markman said refiners would start to see higher investment flows as managers of billion-dollar funds realize their growth potential and get more interested in energy investments.

"I have seen this scenario play out several times with the refiners over the past 25 years, and each time it's amazing to see how quickly, fluidly and vertically they move," said Markman. "When they face a singular fundamental catalyst that radically changes their profitability profiles, everyone wants in all at once and there are just not enough shares to go around."

For those looking for an exchange-traded fund in the oil industry, Markman also suggests SPDR S&P Oil & Gas Explore and Producers (NYSE: XOP).

Other exchange-traded products designed to profit from rising global oil prices include the PowerShares DB Oil Fund (NYSE: DBO) and the iPath S&P GSCI Crude Oil Total Return (NYSE: OIL).

For a closer look at the types of companies expected to benefit from triple digit oil prices, check out the featured article in today's issue of Money Morning: "The Middle East Crisis: Egypt, Libya and Triple-Digit Oil Prices," by Dr. Kent Moors.

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