Oil Stocks the 'Place to Be' as Mid-East Strife Escalates

Oil prices staged a rally on Wednesday partly due to the escalating turmoil in the Middle East, and analysts who expect the strife to worsen are recommending oil stocks as “a great place to be.”


The situation in the Middle East is likely to deteriorate from here and drive oil higher, Michael Crofton, President and CEO of Philadelphia Trust Company, told CNBC. Syria’s Foreign Ministry acknowledged on Wednesday that it had chemical and biological weapons that the country could use if other nations intervened in its civil war.

September NYMEX WTI oil futures climbed from an intraday low of $86.84 to settle 47 cents higher at $88.97 a barrel, and Brent Crude futures rising to over $104.50 a barrel.

“I think oil stocks are a great place to be because of my feeling that the Middle East is going to have a significant problem sometime in the next 18 months,” Crofton said. The government in Syria is close to collapse after a prolonged civil war and there may be civil unrest in Egypt as the military regime in Egypt could be unwilling to give up power amid a leadership transition.

“And if any of those, or multiple of those possibilities occur, then we got a wider conflict in the Middle East which is going to drive oil prices through the roof. So if you can get some domestic [U.S.] oil, you’re in good shape,” Crofton said.

Crofton favors Whiting Petroleum Corp, Hess Corporation, ConocoPhillips, Chevron and ExxonMobil, large diversified players with global holdings and companies that invest in shale and natural gas assets.

Crofton’s views are at odds with analysts who say that oil will decline for the rest of 2012 on poor demand as the global economy remains moribund. Addison Armstrong of Tradition Energy, for one, lowered his forecast by 10 percenton Monday and now expects oil, which averaged $97.25 a barrel through mid-July, to average only $93 for the year, down from his original view of $103.

Beyond weak demand, a flood of supply over the next two years will keep oil prices soft even as geopolitical events in the Middle East keeps prices volatile, Yudee Chang, Principal and Chief Advisor of ACE Investment Strategists, a trading and fund management firm based in Virginia, U.S., told CNBC earlier this week. He expects oil to fall “below or around $50 per barrel” over the next two years.

Sean Hyman, Editor of investment newsletter Ultimate Wealth Report, on the other hand, agrees with Crofton’s view that oil stocks need to be part of any investor’s portfolio.

“I do have Petrobas and I think it’s trading at a huge discount to its book value,” Hyman told CNBC. “It’s got tons of cash on the books and I believe that the price of oil will hit higher from here and as it does, Petrobras will hit higher as well.”

- By CNBC's Jean Chua.

Correction: In an earlier version of the story there was an erroneous reference to the Hezbollah and the West Bank, which has been removed.