Oil investments

By now you should have heard and seen the rising oil prices. As I write this, oil is at $56 a barrel. Some believe that oil is clearly overpriced while others feel it will go even higher.

No doubt high oil prices have a negative effect on the economy. Businesses cost more to run, people spend more money on gas and less in consumer products and overall sales and profits fall.

Oil bears argue that oil have risen too much based on speculation. Oil Bulls argue that although oil prices are high, it is still low historically on an inflation adjusted basis.

I am on the oil bull camp. Oil may have a short to medium term adjustment back to about $45 a barrel but it will never reach the $30 again. The reasons are many but for one, most of the 'easy to acquire' oil from the existing oil wells have been drained. The cost to acquire the remaining oil has risen to $22-$25 per barrel and new oil exploration has also diminished. Add the fact that China and India are fast becoming huge oil importers, buying up all excess capacity that used to act as a price cushion for increased demand in the west . The thirst for oil in China and India is expected to continue to increase for the foreseeable future.

As investors, where can we direct our investments? My advise is to invest selectively in oil stocks. An oil ETF (Exchange traded fund) I recommend is XLE with a very low expense ratio (0.27). XLE has large holdings in many oil stocks such as Exxon Mobil and Chevron Texaco. It has risen over 20% already in 2005. It is trading above $43 and I would start to accumulate below $38 on a pull back.

An adjustment in oil price is normal and expected by about June when the US government will make available some of the 700 million barrels of reserves to help curb prices. They however cannot fight the underlying fundamentals for long and the trend in higher oil prices will continue to increase in the long run.

I will share with you about other oil investment possibilities in my next blog entry.

Good luck investing!