Anyone closely watching the crude oil story this year has likely experienced a bit of vertigo. In less than a month, prices hit a string of historical highs, breaking past the psychological US$100 a barrel mark — and soaring to US$111.80 on St. Patrick’s Day.

The jump over US$110 came on Mar. 17, after news that the U.S. Federal Reserve Board lowered its discount interest rate by 25 basis points in a surprise move the day prior. Analysts say the ensuing rally was indicative of a widening global trend to see crude — which is bought and sold in U.S. dollars — as a hedge against the weakening U.S. currency.

Then, crude oil futures on the New York Stock Exchange dropped more than US$7 as traders and investors fretted that the nation’s economy was maybe in worse shape than previously thought, especially with investment bank Bear Stearns & Co. Inc. — the fifth-largest in the U.S. — almost declaring bankruptcy.

Oil traded as low as US$103.23 a barrel as investment funds sold off holdings following the proposed Bear Stearns firesale of US$2 a share (since raised to US$10 a share) to JPMorgan Chase & Co.; Bear Stearns had traded at around US$30 a share only three days prior, but crashed when it couldn’t come up with the cash investors demanded.

So, where, oh where will oil prices go in this ever-changing environment? And who is best positioned to benefit? The answer to the first question is complex, while the answer to the second is quite simple, analysts say.

“The biggest beneficiary,” says Randy Ollenberger, an analyst with BMO Capital Markets Corp. in Calgary, is the one “who has the most oil.”

Add a strong reserve base and lower production costs and you have a winner, most likely found in the Canadian oilsands, where the bulk of our crude is now produced. Conventional oil producers are likely to have their biggest production and reserves in Newfoundland and Labrador’s offshore oil fields, such as Petro-Canada and Husky Energy Inc. at their Terra Nova and White Rose floating platforms.

Canadian oil companies posted a record $19.4 billion in profits last year on revenue of $123 billion, according to the Canadian Conference Board. This year, profits will rise 18% to almost $23 billion as oil production rises almost 10%, mainly from the oilsands, the board states in its March report.

Players such as Suncor Energy Inc., the granddaddy of the tarsands, Imperial Oil Ltd., with its integrated operations, Canadian Natural Resources Ltd., and Nexen Inc. stand to benefit the most from strong oil prices, but for slightly different reasons, Ollenberger notes.

All oilsands majors are close in production numbers, with Suncor producing 290,000 barrels a day this year, about the same as Imperial Oil, which expects to produce 287,000 bpd in 2008. Petro-Canada is aiming for 289,000 bpd and Husky foresees production of 286,000 bpd this year.

Suncor, however, has the largest reserves, with more than 17 billion barrels in recoverable reserves, and the lowest production costs, at around $28 a barrel.

“Where the distinction comes in and where they start to look more similar is when you start to take into consideration the capital costs,” Ollenberger says. “Because Suncor’s capital is more depreciated, their capital cover charges range around $5 a barrel. If you’re a conventional producer, those charges could be as high as $25 a barrel.”

The average oil producer in the world needs oil to be priced at around US$65 a barrel just to break even, he says. The profit margin gets compressed by the cost structure, when taking capital and return on capital into consideration.

“Existing oilsands players, such as Canadian Oil Sands Trust [the majority shareholer of Syncrude Canada Ltd., the largest oilsands producer in the world] or Suncor, are actually very well positioned because they’ve got very good full-cycle cost structures,” Ollenberger says. “So, when you think of who might be the beneficiary of higher oil prices, it’s companies like that because they have both the reserves and a good cost structure.”

Canadian Natural Resources lays claim to between six and eight billion barrels of recoverable oil in its Horizon Oil Sands Project, an open pit mine slated to start phase one in the third quarter of 2008. And although its reserves are lower than Suncor’s, cost estimates for Horizon are $80,000 per flowing barrel. Suncor’s new in-situ project, Voyaguer, will see costs of $90,000 up to $110,000 per flowing barrel, similar to Petro-Canada’s Fort Hill joint venture.

@page_break@But picking winners is a mugs game as “those companies that produce oil and are able to grow that production, no matter if they are conventional or oilsands, will benefit from high prices,” says Peter Linder, president of Delta Energy Fund.

“Even with much higher costs than a year ago, when oil was US$65 a barrel, that covers a lot of the cost increases” and then some, Linder says.

Linder points to a jittery market rather than fundamental supply/demand issues as pressuring oil to record heights. “The problem isn’t with supply,” he says. “The problem is with traders investing in oil.”

Crude oil prices have gained 16% since January and almost 100% in the last 14 months as investors have used oil as a hedge against a weakening U.S. economy, soaring food costs and geopolitical instability. Linder predicts prices will hover at around US$100 a barrel next year, and stay there for a couple of years.

Others predict oil could break through the US$120 a barrel mark this year and trade as high as US$140 a barrel in 2009. Earlier in March, banks and investment brokers moved up their annual averages in keeping with the fevered pace of crude.

However, some say the industrialized world likely won’t be demanding more oil because of the issues relating to the subprime mortgage crash in the U.S. spilling over into world markets.

“This credit crunch is proving much more of a problem than many anticipated in the U.S.,” says Bart Melek, an analyst with BMO Capital Markets in Toronto. “At the same time, there could be a fairly decent chance that the global economy might also suffer. I’m certainly not suggesting that things are going to collapse, but maybe growth even in the developing world will be slower than expected.”

BMO Capital Markets predicts crude will average US$88 a barrel this year. Melek points out in a research report that low global spare capacity and rising costs are on track to keep marginal producers as the price setters. As such, long-term crude prices are expected to have a floor at around US$75 a barrel, which is the cost of supplying an incremental barrel, the report states.

“The root dynamic remains unbroken,” says Peter Tertzakian, chief energy economist with Calgary-based ARC Financial. “It’s not cyclical, it’s a long-term trend; the other side of the world is industrializing at a very rapid pace, and to fuel that industrialization requires a lot of energy.

“It’s difficult to see how the demand side and the supply side are going to be reconciled as you go out two and three years,” Tertzakian adds. “The sustainability of the supply side to meet the aggressive demand growth is a problem.”

At the beginning of March, Tertzakian increased the private equity firm’s crude oil price average to US$100 a barrel in 2008. But he then softened the forecast after St. Patrick’s day to US$96 a barrel.

People tend to confuse slowing down of demand with an actual change to consumer practices, he says: “Until there’s a material change in the consumptive behaviour of people on this side of the world and on the other side of the world, there’s no reason to believe that oil prices are going to start tracking downward.”

But according to the Centre for Global Energy Studies in London, a downward demand trend for oil products is already on the move in the U.S. Founded by former Organization of the Petroleum Exporting Countries minister Sheikh Ahmed Zaki Yamani, the centre noted in its monthly oil report that gasoline consumption in the U.S. has been falling since last August and recently registered a 150,000 barrel-per-day decline.

“This is hardly surprising, given that gasoline pump prices thus far in March are 25% higher than a year earlier,” the report states. “The American consumer — already bur-dened with debt and troubled by falling house prices and gloomy job prospects — is facing sky-high gasoline prices at a time when petro stocks are at five-year highs.”

Share prices may fluctuate on the whim of a market that can go up or down by US$5 in a day, but there is no question that the major oil companies will do more than survive the stormy weather, Linder says.

“When you have anything over US$80 oil, you’re doing very well,” he says. “So, whether it’s US$105 or US$110, it’s not a matter of survival, it’s a matter of how much profit you’re going to make.” IE