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Three ways to profit from the rise in oil prices

Signs of an improving US economy have been positive for share markets around the world, but they have also helped spur on the price of oil. Falling crude oil stockpiles in the US and fears that Egypt’s oil production may be impeded by ongoing political turmoil have also aided the cause with oil sitting just off its 16-month high of US$109 per barrel.

This is bad news for consumers, compounded by recent falls in the Aussie dollar, but it makes for prime conditions for oil and gas producers earning US dollars. With a range of energy companies available for discerning investors, here are three ways to profit from the situation.

Big and steady energy

Australia is home to several well established big energy companies, among them Woodside Petroleum (ASX: WPL) and Santos (ASX: STO). The existing oil and gas production of both companies delivers strong cash flows, which can be distributed to investors as dividends or reinvested in capital projects and exploration to continue growing going forward.

While the product mix between oil and gas production is becoming more heavily weighted towards natural gas, many gas price contracts are linked to movements in oil prices, which benefits producers of both products. Woodside’s oil production made up just 30% of the company’s production in 2012, down from 40% in 2011 and 43% from 2010.

The growth chasers

Then there are the smaller companies focusing on exploration and fast growth. These companies often have active drilling and exploration programs on the hunt for energy. An ongoing rise in oil prices will produce higher revenues from their production to fund exploration.

Companies like Drillsearch (ASX: DLS) and Strike Energy (ASX: STX) operating in the Cooper Basin are likely to benefit from the rise. The region boasts big potential and is supported by pipeline infrastructure running towards the east coast.

The service crew

Though many oil companies provide their own drilling services, companies involved in supporting services like 3D seismic imaging or pipeline infrastructure will be winners if energy companies can raise production.

Australia’s largest natural gas infrastructure business, APA Group (ASX: APA), could be a winner if companies increase production of oil and gas in response to the rising price.

Foolish takeaway

Long-term, growing demand for oil and gas will likely keep the price trending upwards in the next few years and with quality energy companies big and small set to win, now could be a perfect time to profit from the rise in oil prices.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.

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