How to Position Your Portfolio for $100 Oil

The U.S. economy is not growing like a weed by any stretch of the imagination, but it is not stagnant either. Third quarter GDP came in at 2.5%, and the recent employment picture has been better than expected. Despite the good news, relatively speaking, there is a significant drawback to this. Higher prices for a barrel of oil. West Texas Intermediate crude oil has crossed $95 per barrel, and Brent North Sea is exploding this morning, up more than $2 to $114. The real drawback here is what this will mean for a U.S. and global economy, as it becomes more and more likely that West Texas Intermediate will see $100 per barrel, perhaps as soon as this week. Higher oil prices are a drag on the consumer, as it costs more to go shopping, to work, and live your daily life. Despite all of Europe's troubles, crude has not fallen off a cliff. If you look at this chart, you will see that oil has been on a tear since the beginning of October. It has not stopped, and it looks as if $100 is only a matter of time. Not only is higher oil economically damaging in terms of higher input costs, it has a massive psychological weight with it. It forces consumers to wake up and take notice, and it makes the mainstream media talk about the price, which only weighs on consumers mindsets. Oil is a major input cost for a variety of industries. Automobiles, plastics, fertilizers, and many more. All of these industries either use oil, or some kind of derivative of black gold for their products. If the Federal Reserve were to do a third round of quantitative easing, this could potentially cause oil prices to rise even further. Last week during the press conference, Federal Reserve Chairman Ben Bernanke talked about the potential for buying mortgage backed securities, and Chicago Federal Reserve President Charles Evans actually dissented because he wanted MORE easing. It is very rare for a dove to break from consensus asking for more easing. Many in the markets took this as a sign that QE3 is coming, and more easy money would only mean higher commodity prices. With the potential for more cheap money from the Fed, combined with technical indicators, oil appears likely headed higher. Names like Exxon Mobil XOM, Chevron CVX and Conoco Phillips COP will benefit, but the more unconventional names will benefit as well. Occidental Petroleum OXY is also a name to consider, as it is highly levered to the price of oil. It is not nearly as large as the above mentioned exploration & production companies, but the growth at Occidental is extremely strong. Occcidental reported blowout earnings last week. Oil sands generally need oil prices to be above $75 per barrel to be profitable, and with oil prices 33% higher than that, the drilling in oil sands will continue. Oil sands are generally based in Canada, and a few names that could benefit are Suncor SU and Canadian Natural Resource CNQ. Both of these names are based out of Canada. If investors are not comfortable with individual equities levered to $100 oil, there are a slew of ETFs which help capture some of the upside in oil prices. Names like United States 12 Month Oil Fund USL, Oil Service HOLDRs ETF OIH should also do well. It is important to watch the OIH, as any uptick in this particular ETF could mean that oil companies are spending on services. That benefits names like Schlumberger SLB, Halliburton HAL and Weatherford WFT will continue to benefit in the wake of higher oil prices. With oil prices climbing ever higher, and the potential for additional quantitative easing, there plenty of ways to play $100 oil. Higher "Texas tea" might eventually put a damper on the economy, but that does not mean it should not help your portfolio as well. ACTION ITEMS:

Bullish:
Traders who believe that oil will go higher might want to consider the following trades:

• Occidental is cheap on a valuation basis, if you believe the estimated earnings for 2012. Traders may want to consider positions in Occidental.

• This could also benefit names like Hess HES and Apache APA.

• Names mentioned in the article will also benefit from higher oil, but depending upon risk profile, one might want to consider larger, safer names like Exxon if you are less risk adverse.

Bearish:
Traders who believe that higher oil will hurt the economy and stocks more than it will help the oil sector may consider alternate positions:

• If oil goes higher, traders might look to go long the U.S. Treasury bond ETF TLT, as economy growth slows.
  
  

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