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Oil Prices Heading Higher! Try This Approach

Sunday - 7/28/2013, 2:03pm  ET


Photo Credit: Flickr/Don Hankins

As an energy writer, the most common question I get from friends and family concerns the price of gasoline. Just the other day I was talking to my dad when he mentioned that gas prices back home in New York were now over $3.80 a gallon. I guess I need to stop complaining about local prices that have now shot up to more than $3.30 a gallon.

The bad news, which I had to relay to my dad, is that prices aren't likely to go down again anytime soon. Worse yet, drivers probably should get ready for higher gas prices. Last week's $0.12 jump could only be the beginning because a confluence of factors driving supply and demand are likely to push prices higher. While that's not what drivers want to hear, I do have a solution to help take away a little bit of the pain at the pump.

What's driving prices higher?
Before I give you my solution, let's take a deeper look at the problem. The average retail price of gas is made up of four components. By far, the biggest contributor to the price of gas is oil, which is two-thirds the price of gas. The price of oil is driven by both global and regional market conditions.  

Globally, unrest in Egypt has been a big factor in oil's recent rise. Believe it or not, Egypt is a big deal in the global oil market as it's the largest non-OPEC oil producer in Africa. In fact, U.S. oil and gas producer Apache  is actually Egypt's top oil producer, creating over 363,000 barrels of oil equivalent per day. The concern is that this oil production, as well as oil being transported through the important Suez Canal, could potentially be shut off if unrest in the country turns into an all-out civil war. The global oil markets are simply factoring this potential disruption into the price of oil.

The other problem is more localized as U.S. oil prices are spiking relative to the global oil benchmarks. As of the time of this writing, the spread between U.S.-traded WTI oil and globally traded Brent was a mere $0.30. This past February, that spread was more than $20 a barrel, meaning that oil produced in the U.S. was a lot cheaper to buy than imported oil. A shortage of pipeline capacity created a massive glut of oil in the U.S. which pinched producers' profits but led to big profits for refiners and kept gas prices reasonable. In fact, for every dollar that refiner Phillips 66  could save on domestically sourced oil, the company could reap $450 million in additional net income. That caused its stock to nearly double from the time it was spun off from ConocoPhillips  last April until this past March when it hit its high point. 

If you can't beat them, join them
Unfortunately, the rise in U.S. oil prices are not only causing pain at the pump, but are causing pain for investors in refining stocks. Phillips 66, for example, is down over 17% since hitting those late March highs. That means refining stocks aren't the right investments to combat high oil prices. Instead, the way to profit from the pain at the pump is to simply buy an oil stock.

ConocoPhillips, for example, is up over 15% in the past three months as the company's stock has taken the path opposite the one that its former refinery arm, Phillips 66, took. It's a company that has operations around the world, but it's really benefiting from higher U.S. oil prices as the company has prime position in high-growth U.S. oil fields, such as the Bakken and Eagle Ford. In fact, more than half of the company's oil production growth over the next few years will come from the U.S. Finally, the company also pays a very generous dividend of more than 4%, which can be used to help offset your pain at the pump. So, my best advice to you, and the advice I gave my dad, is that if you can't beat them, join them by adding an oil stock to your portfolio today. 

ConocoPhillips is just one of the many options investors have when it comes to combating the pain at the pump. So, if you are on the lookout for some additional intriguing energy plays, I'd encourage you to check out The Motley Fool's "3 Stocks for $100 Oil". For FREE access to this special report, simply click here now.

This article was originally published as Oil Prices Heading Higher! Try This Approachon Fool.com

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