Step right up and get the latest oil-price forecast! Predicting oil prices has indeed become like a carnival, so what's an investor to do if he or she is uncertain about the magnitude -- let alone the direction -- of any changes to come?
There's hardly anything approaching a consensus on where crude is going. Goldman Sachs thinks $200 a barrel -- who'd have thought it? -- might be a target in the not-too-distant future, while Gazprom, the massive Russian gas producer, believes $250 might be in the offing by next year. But then there's David Herro, who oversees the management of about $20 billion for Harris Associates. He thinks we may indeed see prices head higher but that within a couple of years, they'll be back to $60 to $80 a barrel.
Herro bases his forecast on a couple of factors. He notes that, as most Fools know, demand has begun to slide in the U.S., Europe, and Japan, with more consumers learning to conserve by coordinating their automotive junkets. He also believes that within about five years, the standard internal-combustion engine will have been changed dramatically in the direction of real fuel efficiency.
In reality, all of these predictions may be accurate: We could hit $250 by 2009, only to fall back to the mid-double digits in 2012 or 2013 as we really jam on the conservation brakes. But regardless of what camp you fall into concerning the direction of the all-important black gold, it's still difficult to know how to approach energy investments today. Crude prices have doubled in just the past year, after all.
For my money, it's a must for Foolish portfolios to include a foundation of oilfield-services names, along with perhaps a couple of selected oil and gas producers. That approach, I believe, will provide you with a solid upside opportunity and enough downside protection to gird against a precipitous slide in hydrocarbon commodity prices.
King of oil service
Let's begin with the names that appear to make the most sense. I'd start with Schlumberger
A crucial consideration with most of the service sector's players, including Schlumberger, is that big drilling projects have generally had their economics tested at prices far below current levels. That means it'd take a huge price pullback to negatively affect their business and their earnings. Therein lies much of the downside protection accorded to service investors.
I'm also a fan of Halliburton
And then there are the twins of deepwater drilling, Transocean
My weighting toward the service side reflects the producers' closer earnings ties to commodity-price fluctuations. That, of course, can be good or bad, but I still think it's important to have some producers packed into your portfolio. For starters, it's difficult to quarrel with ExxonMobil
I'm also becoming more amazed almost daily by the accomplishments at Chesapeake Energy
Finally, you might think about putting a few shekels into Petrobras
This is but one way to approach the energy part of your portfolio. It's logical to expect that your research will uncover other ideas that are right for you. My only real request is that you make sure your portfolio absolutely does include an energy portion.
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