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Pushing on a Saudi String

It's probably a good example of pushing on a string: The Saudis have agreed to increase their daily output of crude oil by as much as 200,000 barrels. And crude prices haven't backed off.

There are a couple of difficulties in depending on Saudi Arabia to bail out the world and reduce oil prices. First, the increase won't offset the world's rise in demand -- most of which comes from developing nations like China and India. (Changes in U.S. demand are no longer the be-all and end-all for global prices.) And secondly, the Saudis don't produce the sort of light, sweet crude that's best for refining into gasoline.

Nor will the Saudis' efforts have any bearing on the upheaval in Nigeria -- which does produce optimum crude for refining -- where tribal squabbling caused Royal Dutch Shell (NYSE: RDS-A  ) (NYSE: RDS-B  ) to state late last week that it'll fall short of its contract obligations for exports from the West African nation. There also have been rumors of a union strike against Chevron's (NYSE: CVX  ) Nigerian operations. All in all, ongoing Nigerian chaos has chopped about a quarter of the country's production.

And it's probably not a particularly good sign that crude prices continue to hang in the mid-$130s, despite another announcement late last week that China's National Development and Reform Commission would effectively raise gas prices in that nation by about 16%. In a rational world, that increase would reduce gasoline demand in the world's most populous nation and hence push global prices lower.

While I do believe that crude prices could pull back in the short term, my long-term expectation is that we'll continue to see the same upward march that we've witnessed for three or four years now -- with a real hike in the past year. It's difficult to imagine a pullback to a level below, say, $70 a barrel, where we were (believe it or not) just a year ago.

All this, it seems to me, should only intensify Fools' resolve to be well-represented in the oilfield services sector, the group with the greatest immunity to a slide in commodities prices. My favorites are the usual -- and most profitable -- suspects: Schlumberger (NYSE: SLB  ) , Halliburton (NYSE: HAL  ) , and deepwater drillers Transocean (NYSE: RIG  ) and Diamond Offshore (NYSE: DO  ) .

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Fool contributor David Lee Smith doesn't own shares in any companies mentioned above. He does, however, welcome your questions and comments. The Fool has a globally renowned disclosure policy.

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10/21/2016 4:00 PM
CVX $101.30 Down -0.57 -0.56%
Chevron CAPS Rating: ****
DO $17.40 Down -0.50 -2.79%
Diamond Offshore D… CAPS Rating: **
HAL $48.43 Down -0.32 -0.66%
Halliburton CAPS Rating: ****
RDS-A $50.82 Down -0.17 -0.33%
Royal Dutch Shell… CAPS Rating: ****
RDS-B $54.03 Down -0.18 -0.33%
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RIG $10.50 Down -0.09 -0.85%
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Schlumberger CAPS Rating: ****