How High Will It Go?

Swiss banking giant UBS AG (UBS) expects oil will average $115 a barrel this year, before reaching an average of $156 a barrel by 2012.

Goldman Sachs Group Inc. (GS), which just a few months ago predicted oil would climb to $107, recently increased its forecast to $141 a barrel by the end of the year.

In fact, both Goldman Sachs and JP Morgan Chase & Co. (JPM) recently put forth scenarios that have oil soaring over $200 a barrel within the next two years.

Of course, Money Morning Investment Director Keith Fitz-Gerald – one of the first investment gurus to predict triple-digit oil prices – has gone a step further, suggesting prices will spike as high as $225 a barrel.

“The math is really simple here,” Fitz-Gerald said in a recent e-mail interview from China, where he was heading an investment-research tour at the time. “We are burning through supplies at a rate that’s four times to five times faster than we’re discovering new reserves. Throw in a few [surprises] … perhaps a terrorist event …and add in the accelerating use of oil and gasoline in Third World countries, and we have the recipe for far higher prices. That’s already in the oven.”

In addition to the proprietary strategy he uses to project market prices, Fitz-Gerald said he relied on some of the observations he’d been making as part of the investor trip he was leading through China and Hong Kong. He also made a stopover in Japan.

In China, it only takes a stroll down the street to see that the demand for oil and gasoline is going to increase far faster than most U.S.-based analysts would ever believe – or understand.
“Nowhere is that more evident than China where I’m traveling now,” Fitz-Gerald said in that interview. “Beijing alone is adding 1,500 cars a day. Across China, the number is obviously higher. [The] same [is true] in India, but [to a lesser degree]. Then there’s the other side … evidence suggests that OPEC reserve figures may be artificially high. Imagine what’s going to happen when people figure out that there really isn’t as much oil as everybody thinks. $225.21 is not out of the question … after we get to $187,” which is what his initial target price had been.

Famed investor and best-selling author Jim Rogers shares Fitz-Gerald’s belief that the OPEC cartel may be guilty of some slight of hand in reporting its reserves.

“Saudi Arabia has announced for 20 years in a row that they have 260 billion barrels of oil in reserve,” Rogers recently told Money Morning during an exclusive interview in Singapore. “It’s astonishing. The figure never goes up and it never goes down. They have produced dozens of millions – billions – of dollars of oil in that period of time.

“If you go to Saudi Arabia, you have to wonder: ‘How could this be? How could it be that every year for 20 years in a row, you always have 260 billion barrels of oil in reserve?’ The Saudis say: ‘You either believe us or you don’t.’ And that’s the end of the conversation.”

While a short-term correction in the price of oil may, or may not, be in the cards, there is no dispute about oil’s long-term profit potential. Supplies will continue to tighten, demand will continue to increase, and political clashes will continue to spark price spikes even steeper and wilder than the one we’re experiencing right now.

A Trio of Petro-Profit Plays

Money Morning’s Fitz-Gerald has developed a three-pronged energy-investment strategy for investors who wish to capitalize on his forecast for crude oil prices:

Go Deep: As Fitz-Gerald noted, with oil prices soaring, oil companies have begun to exploit resources previously considered too expensive – or too dangerous – to tap into. When oil was trading in the range of $20 to $30 a barrel – creating meager profit opportunities for so-called “Big Oil” – companies refused to finance any project that couldn’t generate crude for a cost of $10-$15 a barrel. Needless to say, rising oil prices have changed that corporate outlook. At $130 a barrel, companies are looking at an array of exploration opportunities.

In total, producers will spend a record $369 billion on energy projects this year, 11% more than in 2007, said a Dec. 7 report from Lehman Brothers.

Fitz-Gerald favors StatoilHydro ASA (ADR: STO). StatOil is an integrated oil and gas company that focuses on the exploration, development and production of oil and natural gas from the Norwegian Continental Shelf. It has business operations in 34 countries, proven reserves of 1.675 billion barrels and is expanding aggressively to diversify internationally.

In March, the company announced plans to spend as much as $2.1 billion on operations in Brazil and the Gulf of Mexico. It bought the 50% stake it didn’t already own in Peregrino, a heavy oil field in Brazil, and 25% of the deep water Kaskida discovery in the Gulf of Mexico, from the Texas-based Anadarko Petroleum Corp. (APC).

Target China: According to Fitz-Gerald, every investor must have a China strategy. And that also holds true for the energy sector. CNOOC Ltd. (CEO), China’s offshore oil and natural gas explorer, is a prime candidate to fulfill both requirements. At $198.19, the shares are closer to their 52-week high ($218.20) than they are to their 12-month trading low ($90.58), and are on the pricey side, Fitz-Gerald says. But as a long-term play on both China and on oil prices, investors with the patience to let such a strategy play out may find this a profitable pick, he said.

Goldman Sachs on Friday upgraded the shares from a “Neutral” to a “Buy,” citing a profit forecast for this year and next that’s much more aggressive than the consensus Wall Street estimate. Given the weak dollar, CNOOC could also be on the prowl for acquisitions, which would further boost its earnings potential.
Explore Your Alternatives: As Fitz-Gerald likes to say, “alternative energy is an alternative no longer.” Just as the massive upward move in energy prices is jump-starting deepwater drilling, it is also supercharging innovation, starting with research into alternative fuels for automobiles and then moving into alternative sources of energy for the production of electricity for towns, cities and countries.

Ultimately, the United States government is going to have to get serious about promoting alternative-energy research – much more so than it is now, Fitz-Gerald says.
That hasn’t happened, yet. But don’t let that deter you: Even now, investment opportunities abound.

And yet, investing neophytes need to understand that this arena can be as tricky as investing in raw Internet startups – you never know which firms will thrive and which will founder. For that reason, it’s a sound strategy to turn to a fund manager with alternative-energy savvy of its own. Indeed, there are a number of exchange-traded funds (ETFs) that focus on “clean” technology. But we like Fitz-Gerald’s choice: The PowerShares WilderHill Clean Energy Fund (PBW).

Source: What’s Driving the Oil Bull, How Much Further It Will Go, and How Investors Can Profit

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