Oil Prices Will Keep Rising – How Can You Take Advantage?
With oil prices rising above $100 US a barrel, traders and investors may want to consider the impact that the Arab revolution will have on oil supply, oil prices and indeed most economies around the globe.
Rising oil prices are bad news for the economy and bad news for stocks.
The effect of rising oil prices is similar to the effect that an interest rate hike has on consumers. Any kind of hike on energy costs affects the economy mainly in three ways:
Consumers have less money to spend on luxury or discretionary items.
The cost of doing business rises as transportation costs rise. This affects everything from food to clothing and minerals.
There is weaker global growth.
It’s Happened Before
Between 1978-1980, events in Iran and Iraq saw oil supply at one point almost halted and prices rose 250%.
During the first Gulf War in the early 1990s, a decrease in oil supply and uncertainty saw oil prices spike by 130%.
Oil Price Upgrades
Brokerage houses have now upgraded their expectations for oil prices in 2011 due to the crisis in North Africa and the Middle East.
For example, Nomura predicts that with just Libya and Algeria off-line, oil prices could spike above $220 US a barrel.
And Deutsche Bank has just released a report suggesting that a $10 spike in oil prices will shave 0.2% off annual real GDP in the US.
Investment Opportunities
While high oil prices might not be great for consumers, they are good for investments in the energy sector.
The main way to profit from higher oil prices on the ASX is through oil stocks, oil exchange traded funds or oil e-mini contracts.
We are lucky in Australia because we have a number of oil companies to choose from. The three biggest on the market are:
Woodside Petroleum (WPL)
Santos (STO) and
Oil Search (OSH).
A great example of how you might profit from oil stocks happened recently. In mid-2008 when oil prices reached an all time record high, those three oil stocks also traded at record highs.
Companies that are also strongly impacted by rising oil prices are transport stocks, airlines and logistic companies. However, these stocks would usually be negatively impacted with falling share prices. These include stocks like:
Qantas (QAN)
Virgin Blue (VBA) and
Toll Holdings (TOL).
Consumer stocks would also be hit because rising oil prices means higher petrol costs with shoppers having less to spend on discretionary items. Consumer stocks include:
David Jones (DJS)
Harvey Norman (HVN) and
JB Hi-Fi (JBH).
Look To The Long-Term With Energy Investments
Here are some interesting statistics:
The US has the largest consumption of oil per person.
Each American on average uses 23 barrels of oil each year.
Australia uses 15 barrels of oil per person each year.
Now, let’s look at oil consumption in China. China currently uses two barrels of oil per person. And in India less than one barrel of oil is used by each person per year. (Source: BP Statistical Review of World Energy June 2010.)
Can you see how scary these statistics are? If you assume that oil consumption in both of these countries will increase, then there will be a huge impact on the amount of oil that’s available on the market.
Even if India increases consumption of oil to equal that of China, or if China doubles its consumption, you can see that there’s a real recipe for higher oil prices in the longer-term.
So now might just be the time for you to jump on the oil wagon before prices spiral out of control.
Happy trading!
Julia Lee
Equities Analyst
Bell Direct
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