When Do You Buy Oil?


"Given the market's uncertainty, is it better to play oil via the commodity itself, oil producers with stocks or through the relatively safe and high payout space of MLPs?"

Thanks to a strong dollar and sluggish demand, prices in the energy commodity world have been quite weak this year. In fact, crude oil in WTI terms has slumped by about 21% so far in 2012 while Brent crude—the European benchmark for the commodity—has lost about 12.2% in the same timeframe.

These kinds of performances would have been unfathomable just a few months ago when the U.S. economy was on the mend and political risk from Iran and other Middle East nations was leading many to think that supplies would not be able to keep up with demand. However, in just the past six weeks, oil prices have taken these solid gains and turned them into heavy losses, pushing crude oil down double digits in just the past month alone.

Given the ongoing—and apparently spreading—troubles in Europe, as well as the increasingly strong dollar, many are forecasting that oil prices could have further to fall this year. Credit Suisse, for example, looks for oil to drop to $50/bbl. if a severe credit crunch hits the market, while the EIA has recently reduced its price target (although not as drastically) for crude prices in the second half of the year as well.

Yet despite this bearish outlook, there could be a few reasons to be optimistic about oil prices in the second half of the year. A step in the right direction for the euro crisis could be bullish for demand across the board while a return to turmoil in the Middle East—possibly with a Syrian civil war as a catalyst—could boost prices as well (also read "Three ETFs for an Iranian Crisis").

Furthermore, an expansion of QE programs in some of the Western world's key central banks could also be a positive for oil as it may once again stoke fears of inflation and reignite demand for commodities and other real assets once more (read "Follow Goldman into Commodities with These Three ETFs").

Clearly, oil could go either way as we head into Q3 and either continue its recent slump or rise back towards the triple digit level. What do you think will be the case?

Also given the uncertainty, is it better to play oil via the commodity, oil producers with stocks/ETFs or the relatively safe and high payout space of MLPs?

Let us know what you think in the comments below!

Eric Dutram
Zacks Investment Research

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