Last week, oil hit a record $90 a barrel. It's hard to believe that just five years ago, a barrel of oil cost $25! Rising demand from emerging economies, the increasing threat of terrorism and growing political instability in oil producing nations--especially Iraq and Venezuela--have caused oil's price to skyrocket. We're not too far from $100 per barrel of oil, but before you start digging up the backyard for your share of the supply, I have a few better ways for you to profit.
The problem with oil is that most of it is found in politically unstable nations, which makes it difficult for U.S. oil companies to conduct their operations. For instance, Chevron's trying to boost production at one of its fields in Kazakhstan but has been tied up in conflict with the Russian government, who'd rather give preference to Russian companies, or at the very least receive a bigger slice of the pipeline's profits. Even if the government allowed Chevron to increase its production, there are problems transporting oil from that region. Since Kazakhstan's railway system is outdated, it often ends up costing more in taxes to move the oil than to extract it!
Russia apparently also wants to control all of the oil transported around the Caspian Sea, which is why President Vladimir Putin recently met with Iran's controversial president, Mahmoud Ahmadinejad. Russia and Iran border the Caspian Sea, and the region surrounding it is believed to contain the world's third-largest energy reserves. In fact, ever since the collapse of the Soviet Union in 1991, oil companies have been tripping over themselves to get a share of this supply. Unfortunately, Putin believes that Russia, Iran and the three other neighboring countries should not allow foreign oil companies to further develop their oil pipeline projects in the region.
Russia and Iran aren't the only countries doling out an oil hangover. When it comes to proven reserves, the largest is in Saudi Arabia, with Iraq coming in at number two. So when the Turkish prime minister asked his Parliament for permission to pursue Kurdish rebels into neighboring Iraq this week, world markets grew tense, and oil prices shot up $7 a barrel. In one week!
Because of our insatiable appetite for oil, any threat of supply disruption will make prices soar. While that spells a growing headache at the pump, it is actually helping the margins of oil companies. My Blue Chip Growth Buy List continues to benefit from both oil refiners and the companies that service them. Tesoro (TSO) is a different kind of refiner--it dominates Southern California, which has its own unique fuel standards. California gas is always going to be more expensive because of this, and that's why Tesoro is seeing a healthy profit. It has been exceptionally strong recently and should be seeing some nice gains very soon.
My favorite oil service plays include Schlumberger (SLB) and Cameron International (CAM) which are up 11% and 43.4%, respectively, in less than two months. National Oilwell Varco (NOV) is up 44.1% in the same period, and Transocean (RIG) has handed us 14.9% gains as well.
