Money Matters - Simplified

The Lessons From This Week's $90 Oil Price

 There used to be a TV program called This Was the Week That Was, which looked for humor in the more off-the-wall events that had occurred during the past few days. As this week ends, it might be possible to put together such a show on the ups and downs of crude prices.

 

 On Tuesday, the price of crude topped $90 a barrel, at least momentarily, for the first time in two years. When it did so, analysts immediately gulped and grabbed their pencils and keyboards to tweak their forecasts for the 2011 average price, generally to levels above $100. But this frantic set of circumstances quickly reversed itself later in the day, and by Wednesday nerves had calmed and profit-taking had taken over.

The lesson from this frenetic activity? Nothing really has changed. I still think the bias for crude prices is (slowly) upward and that a host of energy stocks, including integrated majors such as ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), to oil-services players such as National Oilwell Varco (NYSE: NOV), can dress up your portfolio nicely. My expectation remains for the price of black gold to eventually move through the next barrier -- $100 -- but I also think there's enough slack in the system these days to put the brakes on runaway movements such as what we experienced in 2008.

What do I mean by slack? For starters, and coincidentally, the members of OPEC, which supplies about 40% of the world's 87 million barrels of current daily consumption, will be convening in Quito, Ecuador, this weekend. I don't know of anyone who believes that major changes will result from the session. But even if global demand were to climb quickly and surprisingly, the cartel has 6.1 million barrels a day of spare production capacity to mute the change. That's slack.

Beyond that, I'm not one who believes that natural gas prices are mired for eternity near $4.50 per million BTU. Although inventories are high now, I believe that, as crude prices trend northward, natural gas will become a more attractive fuel source and will begin its own upward trek. That's why I like both Exxon and Chevron: Each is upping its exposure to gas while it is out of favor and simultaneously providing geographic diversity in its crude production. The latter is particularly important when events such as the recent terrorist uprising in Nigeria hinder a company's output, as it has with ExxonMobil.

Virtually the same arguments can be made for the two biggest oilfield-services companies,Schlumberger (NYSE: SLB) and Halliburton (NYSE: HAL). Both operate essentially worldwide, while also providing leverage to the current strong activity in the unconventional U.S. plays.

So we're ending the week with crude little changed from where we started out. Nevertheless, I can't find anyone who expects a big drop in energy prices. On that basis alone, I'd urge Fools to redouble their efforts to ensure that they're well represented in this important sector.

© 2010 UCLICK L.L.C.