A Safer Way to Play Higher Oil

If you want to make money in the energy sector but avoid seeing your investment sunk in the stormy market, think tankers.

Shipping companies that own oil tankers thrive when demand for crude soars. And thanks to new regulations calling for safer tankers, the global supply of these ships is growing more slowly than demand.

Oil demand is climbing. Nobody disputes that. Global demand for oil will climb by 3.7% in 2004, according to the International Energy Agency's Feb. 11 report. That forecast is a big jump from the 1.8% growth the agency predicted just a month earlier, and it represents the fastest growth in global demand for oil since 1997.

Driving the surge in global demand are growing economies in India, Thailand and Vietnam. But the biggest force in the global oil market is China, where oil demand grew at an annual rate of 10% in January.

Will Crude Oil Prices Fall?

Nobody is sure about supply, however. The Wall Street consensus is that supply will increase enough to cut prices to $25 per 42-gallon barrel from the current $36 level. For the theory to work, a number of events must come together:

• Iraq will pump more oil soon.


• Tighter limits just set by OPEC will lead to more cheating by members.


• Global production will climb as political problems fade in countries such as Nigeria.


• Higher prices now will lead to more drilling and more oil discoveries.

Some analysts even believe that crude oil prices will fall to $22 sometime before year-end. That's why Wall Street believes earnings from energy companies will fall in every quarter this year.

I think Wall Street's wrong about falling oil prices. So, obviously, do the investors who have bid up energy stocks such as ExxonMobil(XOM), Apache(APA) and ChevronTexaco(CVX) by 25%, 26% and 35%, respectively, in the last 12 months. I think oil prices above $30 a barrel are here to stay, and long-term trends of rising demand and increasingly expensive discovery and production will push prices higher from current levels, even if you correct for the effect of a declining U.S. dollar.