Are we heading back to $100 barrel of oil?

The price of a barrel of oil traded above $50 last week, receiving considerable less notice than when the price of oil surged above $100/barrel early in 2008 and its astonishing collapse to approximately $32/ barrel in December.  What is fueling this incremental increase in the price of oil and is it here to stay?

Everyone seems to have an opinion about why the price of oil has begun to rise again. Among the most popular ones are:

1. Inflation: commodity prices tend to rise in anticipation or in reaction to inflation and the consensus is forming that the stimulus packages are solving one issue (the credit crisis) by creating another (inflation caused by the printing of money).
2. Short term Supply is decreasing. As I wrote before, OPEC has indicated that they believe a “right” price for a barrel of oil is $75 and, given their ability to impact supply through production cuts, what OPEC wants, it eventually gets.
3. The Market is correcting itself. Many believe that the fall in the price of oil was due to an over-reaction in the market which is now correcting itself.
4. Global uncertainty. We are sadly beginning to hear about soldier deaths in Afghanistan, coinciding with a NATO offensive being undertaken in that country which will only intensify with the deployment of  17,000 additional troops from the U.S. The price of oil tends to increase during times of conflict given increasing consumption of oil to feed the military machine and the threat that supply may be cut off.

If nothing else the yo-yo effect of the price of oil reinforces that one should not invest based on emotions. Many investors got giddy and bought oil stocks when it peaked and sold when oil bottomed in a panic.

Where will the price of oil go? No one know for certain but consider that the price of oil is mostly independent of government policy since it is a commodity with finite supply.  Additionally, while the much welcomed green movement may help us ween ourselves from fossil fuels, do remember that plastics, used to produce alternative energy sources like wind power, is a chemically modified form of petroleum. Finally, the proposed Suncor Energy acquisition of Petro Canada represents a 25% premium on the 30 day weighted average of Petro Canada share.

These are signs that we may never see super cheap oil again. But whether we will see super expensive oil or some equilibrium between super cheap and super expensive oil is a question no one really knows for certain.

If you want to invest in oil stocks and want to play it safe, think about “integrated” oil and gas companies that pay dividends- these are companies that explore, refine and sell oil and gas to you and I (as opposed to companies that only produce). Think of names like ConocoPhillips, Exxon Mobile and BP.