Timing the market — bullish on oil

Talk about contrarian! I just read an article that fearlessly predicts oil trading at the $300 level within one to three years — “certainly not much more.”

The reporter at the Wall Street Journal’s MarketWatch says it’s a good opportunity for a portfolio “do-over”:

Many of the solid energy, refining, drilling and exploration companies that performed exceptionally during the last surge in prices likely will do well again.

Also, several of the more established alternative energy plays should rebound along with crude oil, and they’re at just a fraction of their year-ago levels. Investors need to be wary of volatility. But it’s prudent to have some exposure.

Shares of many key oil stocks took a plunge, and now they’re offering some great entry points. A few ways to play the coming rally in oil is to simply buy the December 2009 crude oil call options. If you prefer to play the equity side, Exxon Mobil is a good bet for the majors while Halliburton is one for the drilling side. Many others are attractive.

While I’m not sure I’m going to rush out an invest in oil stocks (I don’t have the cash flow, unfortunately) it’s the other side of the article that I found most interesting. Although there is declining demand for oil, there’s still lots of people burning it — the real reason oil prices have declined is more technical:

It’s called “contango.” Contango occurs when futures prices are higher than current prices. The scenarios are not uncommon, but the recent spread widths are extreme by any measure.

For example: the April 2009 crude oil contract is around $38.10 — while the April 2010 crude contract, crude for delivery a year from now, is trading at $50.26. That’s a $12.16 spread.

That means major oil companies like Royal Dutch Shell, Exxon Mobil and BP can store oil on tankers and then sell the April 2010 contract at $50.26.

Even factoring in the cost of storage, they come out better selling forward than selling at current market prices.

Don’t rush out and fill up dozens of jerry cans, hoping to pump it out to suckers in six months from now when gas skyrockets, but it’s an interesting look at the economics of the business that gets away from “the oil companies are screwing us!”