From $200 a Barrel Oil to ?

It wasn’t too long ago that analysts predicted oil prices to skyrocket to $200/barrel. Even though crude oil did sell for as much as $147/barrel it fell well short of the $200 mark. Now, with crude oil selling in the $40 range, analyst predictions of $25/barrel are popping up.

In mid-November the Paris-based International Energy Agency (IEA) released its World Energy Outlook for 2008. The document of nearly 600 pages contains estimates for future supply, demand and price estimates. This year’s outlook also included a study of 800 of the world’s largest oil fields. What we’ve seen in the oil and energy sector is an over-reaction to the good as well as the bad news, resulting in irrational pricing.

In essence, the issued report highlights that the long-term supply and demand picture for oil continues to favor higher prices. The study found that rising depletion rates at existing oil fields make it increasingly hard for supplies to keep pace. According to the IEA, the world needs to invest some $26 trillion in infra-structure and exploration over the next decades. Over the next seven years, the IEA expects the price of oil to average $100 a barrel.

Investors have multiple options to benefit from increased spending in the oil sector and a recovery in oil prices. The United States Oil Fund (USO) is directly linked to the price of light sweet crude oil. If the price of crude oil goes up by 10 percent, so will USO. The Vanguard Energy ETF (VDE) provides broad exposure to oil and energy companies via holdings such as Exxon Mobil, Chevron, Schlumberger, Halliburton and many others.