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Invest in Crude Oil? posted on Monday, 14 April 2008

Stock prices for crude oil are on the rise, and while consumers will likely have sticker shock this summer, investors could be cashing in

By John Lincoln

It’s clear, gas prices are going up, but what does this mean, if anything, about crude oil as an investment?

Like prices at the pump, crude oil prices are showing no signs of slowing. The demand is increasing its strangle hold on the supply of this scarce resource daily and the prices per share of many oil securities have been making significant gains over the last year. Take a look at a security like Chevron (CVX).

The stock started the year under $78 per share and has climbed to highs of $95 per share. Today it’s lingering around $90 per share. Examples like this make it seem like the price per share of oil has no place to go but up. Especially when you consider that it's a limited resource that cannot be recreated.

But, truth be told, there are downfalls the surround the black gold. The majority of the resource is located in one of the most politically unstable environments on the globe - closely tying price fluctuations to the current readiness of these pipelines to distribute. There is also the argument that we’ll become less dependent on oil in the near future. Go to any California parking lot with more than 20 cars and there’s a good chance you’ll see the word “hybrid” proclaimed proudly on at least one vehicle’s rear. And did you know San Diego recently became the first California city to offer E85, or ethanol? However, my thought is that if it’s available, we’ll use the resource until the wells run dry.

Then, too, if the recent Energy Information Administration report rings true, gasoline will hit a peak of about $3.60 in June, and could even rise as high as $4 per gallon. This may discourage some of those ever-popular family road trips this summer.

The bottom line: Because the demand for gasoline fluctuates seasonally and depends on economic and political factors, it can be a volatile investment.

But as a scare resource almost always highly in demand, it will inevitably go up. If the price of oil takes a dip in the near term it could be a great purchase, especially if you’re willing to hold onto your shares for a couple years.

Posted by John Lincoln | 2 Comments