What's one way you can hedge against a near-inevitable rise in oil prices?

Buy shares of integrated oil companies, which are at their lowest price levels, on a price-to-earnings basis (P/E), in more than a decade.

Oil and gas producers in the MSCI World Index traded at a P/E of 7.84 in June, less than half the 17.1 P/E for developed markets, data complied by Bloomberg News indicated.
Institutional investors have been incrementally adding to oil share positions over the last two months, as the global recession shows signs of bottoming. In general, economists expect demand for both oil and refined products to rebound, as GDP growth resumes in emerging markets. Demand from emerging markets, and a leveraging bubble, led to record-high oil prices in mid-2008 -- a factor that helped trigger the recession.

However, although economists see increasing crude prices in the year ahead, oil analysts are mixed on the 12-18 month outlook. Some analysts, such as Goldman Sachs (GS) and billionaire energy investor T. Boone Pickens, see a return to $85 oil by the end of 2009. Others see an oil price collapse to $40 or even $20 per barrel later this year, due to weak demand and high inventory levels that are maxing-out storage capacity.

Twenty dollar oil?! That'll be the day. Oil traded Monday up 91 cents to $64.45 per barrel.

Moreover, the major integrated oils reflect the slow-growth GDP forecast for the next 12 months. Still, unless you see an oil price collapse in the next six months, all are bargains. Here's a summary of each:

Exxon-Mobil (XOM), $69.26. P/E: 9.1. Exxon should benefit from several upstream growth opportunities in both oil and liquefied natural gas, and the company's superior technology should result in these projects increasing production quickly and efficiently. Technically, Exxon's chart appears to have held support at $65, with further support at $62 and $60.

Chevron (CVX), $65.82. P/E: 6.5. Investors have been exiting refinery stocks, due to an unfriendly refinery combination: a stubborn $60 oil price and falling U.S. gasoline demand. Still, look for that gasoline demand dip to end later this year. Hence, Chevron remains an attractive refining play: it owns 7 refineries and one asphalt plant, and has interest in 10 international refineries, for a total operable capacity of 2.14 million barrels per day, half of which is in North America. That's an impressive gasoline position, in the world's most lucrative gasoline market, so look for CVX to advance nicely, as gasoline demand growth resumes.

Conoco-Philips (COP), $43.10. P/E: 4. Another refining giant, Conoco, also should fare well as U.S. gasoline demand rebounds. At these prices, COP is practically 'as cheap as an empty shoe.' And as the late, great founder of the New York Giants Tim Mara used to say, 'Even an empty shoe box is worth $500.'

BP (BP), $49.86. P/E: 9. Look for this above-average reserve replacement, below-average cost integrated giant to improve its fundamentals over the next three years; a $3.36 annual dividend adds to the positive story.

Royal Dutch Shell (RDS.A), $51.15. P/E: 7.5. Co-ventures with Russia, and likely future projects in Iraq bode well for the company. Also, so long as oil prices remain about $57-60 per barrel, Royal Dutch Shell's Canada oil sands operation will add to its bottom line.

Oil Sector Analysis: Cheap oil shares, primarily driven down by the recession. To be sure, in today's less-credit-flush markets, few expect a quick return to $150 oil, but watch how well this sector fares as oil approaches $80. Top Pick: Chevron.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

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