Oil as an Investment in Deflationary Times

We all know that in an inflationary environment oil and other real assets are good places to put your money.  It is easy to find asset classes which keep pace with inflation.  Gold, oil, real estate, stocks, collectibles, maybe even your car and your boat.  Your choices seem endless.
But what about in today’s deflationary environment?  Investments that do well in a deflationary environment are much more difficult to find.  Here are some possible  candidates with my comments in italics.

1. Cash - No upside, but safe, liquid and purchasing power increases with time.  Example:  If you had sold a Florida house 3 years ago for cash, put the cash in a savings account you can now buy two houses with the money.
2. Quality long term government and corporate bonds - This was a great place to be the last 1/2 of 2008, but the trend runs its course as interest rates approach zero.   Even worse, with trillion dollar deficits and quantitative easing you know this game will end someday.
3. Currency plays such as the US Dollar (UUP) or Japanese Yen (FXY) - These currencies do well when the fear factor is strong and markets tank.
4. Inverse ETFs such as SDS, SH, DOG, and DXD - Great for short term trading, but if you are not a day trader stay away, especially the double inverses.  SA has numerous articles on why.

I propose a 5^_th item,  Investments in companies rich in oil and other natural resources.  Consider Oil Rich Stocks such as OXY, PBR, and EOG.  For diversification, but with a higher natural gas component, consider XLE.
Remember “inflation is always and everywhere a monetary phenomenon”.  Prices are determined by supply/demand, not just inflation/deflation.  Worldwide, the supply of “easy” oil is falling quickly, even as demand stagnates.  The large middle eastern fields are in decline.  It is telling that when oil was over $100/barrel Saudi Arabia and the rest of the middle east was unable to up production much.  Therefore, oil prices could continue to rise, even in recession.
Economies such as China, India and Indonesia are again strengthening, if not booming.  Tens of millions of first time customers are looking to buy autos, this has to be bullish for oil.
I would stay away, for now, from the natural gas etf UNG.  There is an oversupply of this relatively inelastic commodity thanks to technological advances in production.  Eventually, natural gas will start replacing oil as it becomes relatively cheaper, but the process will take time.  How many natural gas powered vehicles have you seen on the road lately?
Of course the current rally is not only in natural resources, it is also in world markets.  It is best not to buck a trend.  However, nothing goes up forever.  The test will come when market indices decline, then we will see to what extent oil follows.  For this reason, I would stay at least 50% in cash.  You may find better entry points later.
With dark under-currents of impending doom and crash rumors swirling just below the surface (See numerous SA articles) I would keep a close eye on the rear view mirror.  At least with natural resource positions you have something which, short of Armageddon (and we will all be dead then anyway), will always be in demand for the foreseeable future.
Disclosures: Long SH, OXY and FXY