Oil is Still a Buy

With the BP (NYSE: BP) Deepwater Horizon disaster still churning out oil into the Gulf and worries about European Union still plague the headlines, investor with longer term timelines have some opportunities to add some cheap assets to their portfolios. Commodities, more specifically, traditional energy prices have sunk downwards on pressures that the strengthening global economy will fizzle. However, the recent actions in the Gulf help reinforce the notion that "All the easy oil has been found" and make a dramatic case for rising prices.

Deep Water Concerns

The Obama administration recently announced that he would be extending the moratorium on offshore drilling for at least another 6 months. The Gulf accounts for nearly 1.5 million barrels of oil a day, or about 25% of America's domestic oil production. Taking nearly 90 million barrels worth of oil off the world's table should have some pretty spectacular effects on global prices. The moratorium also comes at a time when historically, oil prices peek.

The effects of the spill are quickly being felt worldwide. Norway is locked in a debate about whether or not to open up its oil rich, yet fragile ecosystem, around the Lofoten Island. Petroleum economists estimate that this offshore field in the deepwater North Sea contains nearly 1.3 billion barrels of crude. With Gulf disaster, Norwegian officials are hesitate to begin drilling or opening the fields at all. With current technology, a clean-up of a major spill in the icy turbulent waters of the North Sea is almost impossible.

Regulatory reviews of offshore projects in the U.K., Canada and China, are underway and International Energy Agency believes that crisis has the potential to be a "supply-side game changer."  The IEA predicts that in other deepwater prevalent nations, such as Angola and Nigeria, an additional 550,000 daily barrels "could be at risk."

I would expect that this scenario will continue to play out throughout the world as developed nations wrestle with the effects deep water drilling on their ecosystems.

Growing Demand

When the financial meltdown in 2008 sent the demand for crude oil tumbling, OPEC cut its production levels to maintain operational profits. Non-OPEC members have been struggling with relatively flat oil production for the past 10 years. Over this time, emerging markets have added nearly 5 million extra barrels a day to their demand. With overall global GDP is set to grow in the 4-4.5% range, essentially where the world's economy was in 2007, oil prices are far lower than their peak. The reason stems strictly from the broad-based global sell off world in equities, commodities, and other currencies due to the fear of contagion in Europe. The growing demand story for both developed and emerging nations is still strong and the sell off is a perfect time to add oil and energy related stocks to portfolio.

Adding Some Energy to a Portfolio

With the long-term demand trends in place for crude oil and energy, it makes sense to add exposure to the energy sector. Nearly 15% of the S&P 500 is weighted towards energy stocks and the Energy Select Sector SPDR (NYSE: XLE), is the most liquid way to add the sector. Trading nearly 20 million shares daily and tracking 42 of the largest domestic energy companies, the ETF makes sense as starting point as increased regulatory costs for deepwater drilling may prevent smaller oil companies from making any sort of real commitment to the Gulf. The SPDR S&P Oil & Gas Equipment & Services (NYSE: XES) which holds drillers and oil service companies, looks attractive after the months of bad news. Any decrease in offshore drilling will need to be met with increased onshore production. The oil service industry will get a boost as existing wells will need to increase efficiency and pump ever drop necessary to meet demand.

Foreign options are equally as attractive. Brazilian oil giant Petroleo Brasileiro (NYSE: PBR) may be an unintended beneficiary of the oil spill as investment capital destined for the Gulf shifts other places. As long as companies are prohibited from doing exploratory drilling in the Gulf, they will be forced to look elsewhere around the globe. Any oil project in Brazil, pretty much requires Petrobas as partner. The company could see a boost as this shift occurs.

France's Total SA (NYSE: TOT) also looks interesting as a victim of being an oil company and European.  Total ended the first quarter with only a 34% debt to equity ratio, significant global reserves and a nearly 7% dividend yield. The French company currently sells for a forward P/E of just 6, rock bottom by any standard.

On the actual crude side, the PowerShares DB Oil (NYSE: DBO) which invests in farther out futures contracts to help prevent contango has outperformed the more popular United States Oil Fund (NYSE: USO). Investors not wanting the tax headaches associated with these partnership investments could use the iPath S&P GSCI Crude Oil (NYSE: OIL) exchange traded note.

"Never Let a Good Crisis Go to Waste"

The tragedy in the Gulf is enormous to comprehend and oil stocks have fallen significantly over the past few months. The demand for crude oil however remains strong and any new environmental regulation should only help to push up prices. The sector is cheap and longer term time-lined investors could use this temporary dip to load up on energy stocks.

 

Disclosure Statement: At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.