by Rana Williamson

Created on: May 19, 2009   Last Updated: May 26, 2009

Energy Information Administration analysts predict a 1.6% drop in global oil demand in 2009, a concern counterbalanced by a prediction from the Cambridge Energy Research Associates, which posits a fall in production of 7.6 million barrels a day, to only 101.4 million by 2014. The drop in supply relates directly to OPEC's moves to keep price levels above $50 a barrel by lowering output from member nations by 4.2 million barrels. Additionally, large oil companies have dramatically slashed slated capital expenditures. Taken collectively, this information suggests that when the price of oil does come back, supplies will be tight, thus driving prices even higher.

Violence by African militants in the continent's major oil producing region further complicates the supply issue. The latest reports from Nigeria by Reuters indicate that the Movement for the Emancipation of the Niger Delta (MEND), a militant faction, continues to wage all-out war in the region, which lies at the center of Africa's oil and gas industry and is home to both the Chevron (CVX.N) Escravos export terminal and the Warri refinery, with a daily production level of 125,000 barrels. The story is not a new one in the war-torn country, where fighting has brought oil exports down by a fifth since 2006. The latest round of fighting, which erupted on Friday, May 15, is the most marked outbreak of violence in eight months.

Couple these considerations with the value of the oil sector. The Amex oil index has traded at six times its value for the last year with a dividend yield of 4%. Moving into oil shares seems like a smart investment, but picking the right "horse" to bet on, as always, is the tricky part of the proposition. Analysts recommend looking for companies in the best position to drive big production increases. Of that crowd, Chevron (CVX) looks to pick up 2.7% annually in production through 2012 according to Barclays, most likely by tapping new reserves in Brazil and Iraq. Smart investors, however, might dig a little deeper beyond that obvious call and cast an eye toward Petroleo Brasileiro (PBR).

Based in Rio de Janeiro, Petroleo Brasileiro has made three recent deep water discoveries (their specialty) that look to be mega-fields. The company also has a solid hold on the emerging Brazilian natural gas sector. PBR operates in 27 countries and four continents and is currently the fifth largest oil company in the world. In 2008, they exported 673,000 barrels a day, an increase of 9.4% over 2007, including a 103,000 barrel a day surplus. They bettered their 2007 export value by 42.7%, bringing in a 2008 figure of $21.245 billion. Common shares currently sell around $39, trending up. (The 52 week low was $14.73.) Preferred stock can be had at a discount (85% of the common price and more at various times over the last year.) This all puts PBR in the sweet spot for oil investing: current value pricing plus significant long-term potential for rapid production increases.

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