Oil’s Going Back to Three Digits — and What this Means for Your Portfolio

By Mitchell Clark, B.Comm. — Ahead of the Street column

It’s surprising to see the price of oil as strong as it is. A barrel is getting very close to $85.00 and it’s pretty clear that traders are speculating on economic strength in Asia, not domestically. Increasing demand for oil in developing countries is offsetting a lack of demand growth in the rest of the world, with overall consumption expected to rise modestly over the next several years.
Related to oil, it wasn’t too long ago that alternative energy was a hot investment theme for the stock market. In particular, solar energy stocks were once the darlings of the Street. Enthusiasm for this sector faded when growth rates couldn’t match speculators’ expectations and a lot of these stocks are still stuck in the doldrums.Developing countries like China and India burn a lot of diesel fuel to generate electricity (along with coal) and this appetite is only going to increase this decade. Particularly in China, there isn’t a national electrical grid, or a regional one for that matter. A lot of smaller communities and industrial customers have to come together and build their own electrical grids in order to operate their businesses. While there is a push for cleaner electrical generation in these countries, demand far outstrips supply and this is why diesel fuel and coal are being burned. Add in a burgeoning desire for consumers to own their own vehicles and you can see why oil is over $80.00 a barrel.Right now, the price of oil and gasoline isn’t burdensome to consumers and most industries like it was previously. The economy can recover with oil around $80.00 a barrel. But, if oil were to push $95.00 a barrel, then consumers would be in a real pickle again and so would automobile manufacturers.

I think it’s reasonable to expect that the coming inflationary price cycle will affect oil prices. In addition, once our economy returns to a normalized growth rate, there will be a lot more demand pressure on oil and gasoline. Regardless, I think you can bet that oil prices will be higher in a couple of years than they are currently.

If you’re an income-seeking equity investor, I think you should have an integrated energy producer in your portfolio that offers a sizeable yield. With China and India growing their economies around 10% a year, once we get back to normal, then it’s easy to imagine $100.00 oil once again.