4 Ways to Profit Now from $100 Oil

03/03/2011 10:23 am EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

My calendar is getting crowded.

Tomorrow has been designated another Day of Rage in Iraq, despite 23 deaths in the last one. March 11 is bigger still, marking the first such event in oil kingpin Saudi Arabia.

And every day is now a day of rage in Libya, Yemen, Oman, and Bahrain.

I have no idea what the turnout—or the consequences—will be next week in Saudi Arabia, and neither do the absolutist kingdom’s secret policemen, nor the activists who started the relevant Facebook page.

One of the more amusing rumors to spring from the popular Arab uprising has Saudi King Abdullah planning to buy Facebook to squelch the protests. From that extra-long limb, it’s just a short jump to the Israeli underground bunker being used to orchestrate the unrest, as the Yemeni president claims.

There was another, much more ominous rumor circulating Wednesday about the violent death of one of the main administrators of the Facebook protest page for Saudi Arabia.

Rumors are rife because no one has much of an idea, really. If the CIA is in the dark, what chance does anyone else stand?

Why Crude Is Headed Higher
What’s not a rumor is that crude is fetching $102 a barrel. I was bullish a month ago? at $91 a barrel, and remain so today.

We tend to overestimate the effect of price changes whenever they pass a round number like $100. In fact, as Elliott Gue recently pointed out, energy accounts for less than 10% of US consumer spending. He estimates that the recent price spike is costing the typical American less than $30 a month—not immaterial, obviously, but hardly a calamity.

General Motors (NYSE: GM) just sold 65% more full-size pickup trucks in February than the same period a year ago, and gas last month wasn’t exactly cheap.

Throw in continuing strong growth in emerging markets, on top of the industrial boom in the US, and energy demand looks relatively resilient. In contrast, supply continues to be constrained, with little in reserve to make up any shortfalls from political disruptions.

When Plan B for Libyan oil is the sourer Saudi crude, subject to the continuing cooperation of the disgruntled Shiite majority in the key oil-producing province, that’s a problem. The Saudis just arrested a popular Shiite cleric after he called for a constitutional monarchy and an end to corruption and discrimination in a sermon.

Tawfiq al-Amir is right: The absolutist Saudi monarchy is an anachronism destined to be swept away by the times—we don’t know when, but its chances of hanging on to the bulk of its current prerogatives for decades look modest.

And change could obviously come much sooner than that: Just ask Hosni Mubarak. I don’t believe $100 oil properly discounts the possibility of unrest in Saudi Arabia’s oil-rich Eastern Province, or the likelihood of Saudi tensions with Iran, which has long sought to incite Shiites in the Sunni-ruled Arab states on the Persian Gulf.

Next: How to Profit from $100 Oil

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How to Profit From $100 Oil
What are the investment implications of triple-digit crude, if it’s here to stay?

They’re most bullish for another commodity—gold. The precious metal is back at a record and looking more and more like a one-way bet. If high crude prices don’t stymie global growth, recipients of the petrodollars will have every incentive to convert them into a sturdier store of value, and bullion is the most obvious alternative.

Conversely, if the economic cycle were to falter at a time of painfully high unemployment, more asset purchases by the Federal Reserve might follow, likewise devaluing the greenback against gold.

In either case, a physical ETF like the SPDR Gold Trust (NYSEArca: GLD) might make a better risk-adjusted bet than shares of gold miners, who are facing higher extraction costs as energy prices rise.

The next best plays on high oil prices are the major exporting countries, particularly those unlikely to see the populace vent its rage any time soon. Topping that short list is Russia, which now rivals Saudi Arabia in total crude production as well as net exports.

Sure enough, the Market Vectors Russia ETF (NYSEArca: RSX) is up 7% since bouncing off its ascendant 50-day moving average nine days ago.

But on a per-capita basis, Russia, which exports something like 0.05 barrels of oil per person per day, is a piker next to happy little Norway—which exports something like 0.44 barrels per capita per day (US Energy Information Administration numbers are for 2009 in both cases.)

The Global X FTSE Norway 30 ETF (NYSEArca: NORW) is up 13% since its November launch, which in all likelihood does not fully reflect the effect of higher oil prices on Norway’s small economy (population is just 4.8 million).

One key cog in that index, Norwegian drilling rig maker SeaDrill (NYSE: SDRL) is up only 11% on the year, which seems like a gift from the Norse gods, considering the 5% dividend and modest valuation, especially given recent merger activity in this space. We know Jim Jubak is a fan, as is Bryan Perry.

SeaDrill will face cost pressures as oil prices rise, because the Norwegian krone will gain on the greenback. [Note that it is a Norwegian-listed and managed company registered in the Bahamas, and most of its revenue and expenses is denominated in US dollars—Editor.] But its offshore drilling equipment should see ever-growing demand—seals and seagulls don’t plan days of rage.

[Correction: The original version of this story misstated the per-capita oil exports of Russia and Norway. This has been updated—Editor.]

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