Now matter how high oil prices go, investors hoping to strike it rich will need to know where to drill. But some people see plenty of choice spots. Early prospectors hit a few gushers by tuning out the noise questioning last year's big rise in oil prices. Exploration outfits Apache ( APA) and Chesapeake ( CHK), for instance, have rocketed 40% and 67% since last spring on strong commodity prices. Even so, some experts believe the really big energy discoveries are yet to come. "As you know, we like energy stocks -- a lot," Robert Howard wrote to subscribers of his Positive Patterns investment newsletter late last month. "And they have done well for us over the years. But honestly, now more than ever, we think this may be the time for you to overweight your portfolio in the sector." If anything, Howard has seen his optimism rise along with oil prices that, last week, hit a 13-year peak of $38 a barrel. Howard is convinced that cheap energy may finally be a thing of the past. And he isn't necessarily alone. A number of industry experts believe that tight supply and strong demand may keep energy -- and thus energy stocks -- expensive for some time to come.
Pfeifer went on to single out ConocoPhillips ( COP) as his favorite pick in the group. He also likes ChevronTexaco ( CVX) and ExxonMobil ( XOM). Howard likes the supermajors as well. He even recommends Royal Dutch/Shell ( RD), despite the company's massive writedown of proven reserves. "We have NO reservations about buying Shell here," he wrote last month. "Be our guest." Howard says the supermajors are valued on the basis of $25 oil. Still, he likes the drillers -- particularly Baker-Hughes ( BHI) -- even more. Indeed, he sees big opportunities across the energy sector. "If oil goes to $40 or $45," he said, "it will be like shooting fish in a barrel."
"It was a lot easier for me to tell people to buy two years ago, when no one believed" in high energy prices, said Cartwright, who covers energy bonds for BOSC, an affiliate of Bank of Oklahoma. "My only real concern about investing in oil and gas stocks and bonds today is that, now, everybody wants to do it." Even Cartwright expects oil prices to remain between $30 and $40 for the rest of the year. He believes that worldwide oil supplies will continue to be disrupted by political unrest in the Middle East, Nigeria and Venezuela. At the same time, he sees oil demand rising with economic rebounds in the U.S. and China. He points to the latter country, in particular, as a growing consumer of fuel. "The potential that one out of 10 Chinese citizens could have a car 20 years from now puts a huge demand on world oil supplies," Cartwright explained. Bear Stearns analyst Leuffer downplays China's current impact on worldwide oil supplies. He says that China still consumes less oil than Europe, Japan or the U.S. Moreover, he describes oil statistics -- particularly from China -- as unreliable. Still, he acknowledges that China's growing appetite for oil could lift worldwide demand, and possibly prices, down the road. For now, Leuffer offers his own explanations about today's high energy prices. And he singles out the strategic reserve as an especially powerful influence. "Oil traders seem to be viewing the SPR as a black hole into which oil simply disappears," Leuffer wrote. "We think this reflects a belief that the government will not release oil in any situation other than a supply emergency, and that the SPR fill is likely to continue." Leuffer isn't necessarily convinced that such expensive stockpiling is a good idea. Already, he points out, the SPR accounts for 1% of domestic oil demand -- and he sees no reduction in sight. "We believe
a cutback would cause oil prices to fall," he stated. "It would be like giving the U.S. and world consumers a tax cut. However, the government shows no signs of slowing purchases." In the meantime, he acknowledges, investors have started to question whether energy prices will ever fall back to historic levels again. "The sharp rise in oil prices to $37 ... has coincided with a number of significant events involving geopolitics, macroeconomics and the petroleum industry," he summarized. "These have piqued the interest of investors and are causing many portfolio managers to question whether we have entered a new era of sustained high oil prices."