Oil Heading Higher in 2012

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- 2011 has seen oil increase in price almost 15%, making it the third straight year that oil prices have increased. And 15% should be considered a very good result for consumers and business, considering that Brent crude, the benchmark upon which most refined products are based, was pushing upwards towards $130 a barrel earlier this spring.

We won't get as lucky in 2012.

What has been holding down crude for the past two quarters has been a combination of factors: First, negative news from Europe put the deep threat of recession contagion throughout global markets. Second, the lack of transparency into the Chinese markets are making it difficult to predict whether China can engineer a "soft landing" or whether more depressing data that has been emerging is the precursor of a real commodity crash.

And third, increasing supplies from Libya and Iraq are coming on line faster than many thought. Combine this with a slowing Europe and a U.S. consumer who is getting slowly better at conservation and you've got weakening prices for oil.

While many of these factors will not go away in 2012, many of them are being answered enough to allow the oil market to again find the kind of buying interest it saw in 2009 and 2010.

Saudi Arabia and OPEC have now taken steps to slowly close down surplus supplies in the coming year and force prices to remain sticky above $100 a barrel and make prices one or two headlines away from testing 2011 highs of $125 a barrel.

In a very underreported story, the Saudis abandoned a $200 billion, 10-year program of development that could have increased marginal barrel reserves in the kingdom by as much as 5 million barrels a day.

In addition, OPEC ministers earlier this month in Vienna agreed to a daily output ceiling of 30 million barrels a day -- the last time OPEC established production limits cartel-wide was more than three years ago, when prices were closer to $50 a barrel.

These are the beginnings of a concerted supply squeeze. If you add any disruptions in 2012, either from Iranian sabre-rattling in the Straits of Hormuz, from a collapse of a newly U.S.-free Iraqi infrastructure, from a hiccup from newly instituted Libyan oil company, or from a host of other issues neither you or I could possibly plan on and you've got a streaking price for oil -- perhaps approaching the all-time highs we saw in 2008 of $147 a barrel.

There will be further upwards price pressure from investors looking to cycle back into commodities, and particularly oil after the start of the New Year. Outflows have been the theme of the last two quarters, both in equities as well as commodities. But as confidence in the markets continues to increase, so will the risk appetites of investors. I expect a good portion of that appetite to turn to oil.

There are lots of ways to play this, but perhaps the simplest is with the two largest energy ETF's, the Energy Select Sector SPDR ETF ( XLE) and the Market Vectors Oil Services ETF ( OIH). Both of these provide super liquid and sector wide exposure to both mega cap energy companies and oil services companies. Both sectors will greatly benefit and rally strongly as oil begins to.

2012 looks to be another strong year for energy.

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