The price of oil shot up in the fourth quarter of 2011 and now stands at about $106 a barrel. The U.S. Energy Department’s latest forecast calls for oil prices to average around $105 for 2012. Tensions in the Middle East have driven up prices and continued economic growth around the world is likely to sustain triple-digit oil prices.
For investors, this might be a good time to include some energy in your investment portfolio. Possibilities include:
Major oil companies. They have ample cash flows and diversified sources of oil so you probably should own such companies. Morningstar recommends Vanguard Energy fund, which is heavily skewed towards the largest companies in the industry. The top holdings include ExxonMobil, Chevron, and Occidental Petroleum.
Oil service companies. With prices high, oil drilling is likely to accelerate. That’s good news for the companies that provide rigs, tools, and related services. Invesco Energy fund, which has posted the category’s best return over the past five years, includes service companies Schlumberger, Baker Hughes, and National Oilwell Varco among its largest holdings.
Master limited partnerships. Most MLPs are in the business of transporting petroleum, mainly through pipelines. Increased demand for oil means more petroleum will flow through pipelines and more cash will flow to investors. Alerian MLP is an exchange-traded fund holding a basket of ETFs; its current yield is nearly 6%. Top holdings are Enterprise Products Partners, Kinder Morgan Energy Partners, and Plains All American Pipeline.