Crude oil futures on Nymex are up above $136 a barrel. But oil may be due a drop soon, says Ben Traynor in The Fleet Street Letter, and if they do, you better know how to protect your portfolio.

Earlier in the day, crude oil prices neared $138, closing in on record highs. Traders didn’t like OPEC’s renewed refusal to increased output.

A weak dollar isn’t helping. Neither are successful attacks by Nigerian militants against Chevron and Shell’s oil facilities in the Niger Delta

Much of the media’s attention is focused on Washington’s high-profile efforts to bring down oil and gas prices by passing laws to curb speculation in the oil market.

The House Subcommittee on Oversight and Investigations says that speculators are responsible for 70% of oil contracts traded on the Nymex — up from less than 40% at the beginning of the decade.

The presidential hopefuls are making their voices heard on the subject, too.

“We all know that some people on Wall Street are not above gaming the system,” said McCain last week in Houston. “When you have enough speculators betting on the rising price of oil, that itself can cause oil prices to keep on rising.”

“Big investors or purchasers or buyers can artificially jack up the price of oil in order to secure short-term profits,” said Obama from his campaign plane.

There are good reasons why oil could come down off its highs, says Ben Traynor in the Fleet Street Letter. High oil prices incentive more exploration. And more exploration means more likelihood of more oil finds. This would increase supply and bring down prices.

Here’s the skinny on how to protect yourself if oil does fall off its perch…

Oil, it seems, hits a new record high practically every week. And it’s got western politicians chewing the bedclothes.

After all, the economies they preside over depend heavily on oil. The current price spike is wreaking havoc — threatening inflation spirals… strikes… you name it. The west has practically begged the oil producers to up their supply. It hopes this will help bring down the price of oil — which this morning was $136 per barrel.

Yesterday, at the Jeddah Energy Meeting, the Saudis confirmed what everyone had already heard. They’re going to raise production by 200,000 barrels per day (bpd).

Will this do the trick? Will it send oil’s bull run into reverse? And how should you, as an investor, position yourself for when oil makes its next big move?

For starters, no-one’s convinced the Saudis’ move will make a blind bit of difference.

Chakib Khelil, head of OPEC, says it’s not lack of supply that’s driving up oil. It’s speculators.

Meanwhile Jeroen van der Veer, chief executive of Royal Dutch Shell (RDS.A), says there is no “silver bullet”.

“What I’ve heard so far are basically all good ideas, but it will probably not change the price tomorrow morning,” he said.

And then there’s Nigeria. It’s been estimated that output there has been cut by 300,000 bpd this year as a result of rebel attacks on pipelines.

So, 200,000 bpd are being added, but 300,000 bpd are being taken out. It doesn’t take a genius to figure out that this should push the price up, not down.

So don’t expect an oil price collapse any time soon. Our research director Theo reckons oil still has a long way to go yet.

Looking further out, though — and we’re now talking years rather than months — there are reasons to believe the price will eventually come down.

The first oil price shocks of the 1970s had a profound effect on western economies. The three-day week, for example, became a feature of British life.

But as time went on the west adapted. Habits changed - we used more fuel-efficient cars. We reduced our demand for oil.

We also started to look for oil in new places — a move which led to North Sea oil production. This increased supply.

I believe something similar could happen again. The FT’s Lex column today suggests that developing countries — whose thirst for oil is often cited as a key price driver — could design cities with an eye on keeping oil consumption down.

These countries have an advantage over the west in that their urbanisation is a work-in-progress. They can build their cities with Peak Oil in mind — for example by incorporating mass transit systems so that fewer car journeys are made.

Add in the increased output from new discoveries — high oil prices are a major incentive to explorers — and there are good reasons to believe oil will eventually retreat from its current highs.

This makes a big difference in how you invest. Oil is something investors should have exposure to — but you need to take account of the downside.

I believe, somewhere down the line, oil speculators will get burned. A pure play on oil is the best thing you can have — so long as the price is going up. If it goes the other way, you lose. And you could lose big.

Garry White, our commodities expert, has selected two stocks which offer you some protection against an oil price fall — while still allowing you to reap the benefits if the price continues to surge.

Find out HERE how you can benefit from Garry’s advice.

Source: Where Next For The Oil Price?