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Investing in Oil Prices, Not Companies

by: Kevin Stecyk
Saturday, I provided some thoughts with regard to the Saudi Oil Conference. Robert F. Worth and Jad Mouawad wrote an excellent article At Oil Conference, Saudis Offer Slight Rise in Production (free registration is required) for The New York Times. I will just offer a teaser quote and encourage you to read the article in full.

Some analysts and oil traders had expected a much larger production increase from Saudi Arabia, the world’s top oil exporter.

But King Abdullah and the British prime minister, Gordon Brown, who walked into the high-ceilinged hall together as a military band played, soon offered totally different perspectives on the problem and how to approach it.

The king spoke of the “selfish interests” of speculators as a main reason oil prices have risen 40 percent this year, urging the gathered ministers to “rule out biased rumors and to reach the real causes for the increase in price.”

But Mr. Brown squarely pointed to fundamental economics and “oil demand rising faster than supply.” The U.S. Energy secretary, Samuel W. Bodman, put it more bluntly in a meeting with reporters, saying “there is no evidence we can find that speculators are driving futures prices.”

I am firmly in the camp of not blaming the speculators and instead blaming fundamentals. The demand is outstripping supply. Until either we reduce our consumption or we find more oil, prices will continue to remain high.

For those considering investing in oil companies, you might wish to consider investing in oil futures or an ETF such as U.S. Oil Fund (USO). Often companies will have other challenges such as increased royalty and taxes as oil prices rise. Companies will often face increased costs and have difficulty replenishing their reserves. But with futures or an ETF that mimics oil prices, you can focus solely on oil prices and not have to worry about company specific issues.