Now that oil is a long way from the $145 per barrel peak it hit in July 2008 and nobody on Wall Street is predicting, as Goldman Sachs did in 2008, that oil is headed to $250 a barrel, we’re not hearing much about peak oil anymore.

The peak oil model, initially developed by oil geologist King Hubbert and which accurately predicted a peak in U.S. oil production between 1965 and 1970, says that the production from an oil field grows exponentially over time, then peaks, and finally declines. The model has been applied to individual oil fields, national oil industries, and global oil production. Back in 2008, the fiercest proponents of peak oil as a global model were predicting that the world would start running out of oil sometime around 2020.

Now that the world is awash in oil, the only people talking about peak oil are its opponents, who are dancing on what they depict as the grave of what they call a “theory” that was never worth the graph paper it was plotted on.

Well, I still think that the peak oil model is the most useful description of what we see happening in the oil industry today—even if West Texas Intermediate, the U.S. benchmark, closed at a twitch under $100 a barrel on Friday, February 3. (Brent crude, the European benchmark closed at $114.58.)

And, I’d go on to say that the peak oil model is the best way to understand what’s happening to the prices of other commodities, especially copper.  (Full disclosure: I predicted that oil would go to $180 a barrel shortly before it began its collapse from the $145 a barrel high in 2008. And full, full disclosure: The only one predicting $250 a barrel oil right now is Iran, which is threatening that prices will reach that level if developed economies impose tougher sanctions on the Iranian economy in an attempt to slow or stop that country’s development of a nuclear bomb.)

And I think it’s even useful for thinking about how to invest in commodities such zs iron ore that, currently, don’t fit the peak oil model at all.

Let me explain why I still find so much value in this “discredited” theory. Read more

Update Schlumberger (SLB)

Yes, Schlumberger (SLB) beat on earnings ($0.87 instead of the $0.85 Wall Street expected) and on revenue ($9.62 billion instead of the estimated $9.3 billion) but the real news in the oil service giant’s July 22 quarterly earnings announcement was a return of pricing power.

Schlumberger reported seeing the ability to successfully raise prices across all its product groups and all its geographies. Pricing improvement started near the end of the second quarter in its international product lines and in liquids-rich drilling in North American shale formations. To Schlumberger this doesn’t look like a short-term trend. The company says that it sees an oil-and-gas-industry-wide shortage developing for oil field services. The shortage is a result of the boom in drilling in North America—especially the exploration and development of difficult geologies such as shale—and of the expansion of activity by international oil companies—again often in difficult geologies such as very deep sea drilling—in an effort to replace the oil lost to the Libyan civil war.

The potential oil services crunch is a result, in Schlumberger’s view, of simultaneous booms in North American and international exploration and development. Until recently declining activity in North American created a services supply buffer that supported international exploration and development without leading to an increase in oil service prices. The boom in North America set off by new finds of oil and natural gas in shale formations from Texas to the Appalachians has soaked up that buffer and looks like it will produce a shortage that will support higher prices.

Schlumberger didn’t report an increase in gross operating margin this quarter—at 20.6% it was essentially flat with the 21.6% reported in the second quarter of 2010. But if the pricing improvement that the company reported at the end of the second quarter runs for a while, margins will follow. That should produce quite an earnings bang in 2012. Standard & Poor’s raised its earnings estimate for 2011 to $3.75 a share from $3.69, and then jumped its earnings forecast by 23 cents a share to $5.28 in 2012.

I put a 12-month target price of $108 a share on the stock, which closed at $94.70 on July 25. That’s roughly a 12% gain from here. If you own the stock, I’d hold it (because I think it’s a very low risk way to make a 12% gain) and look to add shares on any pull back on general market volatility. If you don’t own shares, wait for a dip to $89 or so. That would give you a 20% gain to my target price. The stock pays a dividend yield of a little less than 1%. (The stock is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ )

Full disclosure: I do not own shares of Schlumberger in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Schlumberger as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

On January 28, I argued that the U.S. economy is still in the early recovery stage of the business cycle, and that you should overweight your portfolio toward the stocks that do best at this point in the cycle: “Sectors that do best are usually industrials, near the beginning of the stage; basic materials; and, near the end, energy.”

 The next stage for the U.S. economy is late recovery. “Sectors that have done well in this stage include energy and, near the end of the stage, consumer staples and services.” (For more on investing for the economic cycle see my post http://jubakpicks.com/2011/01/28/where-the-heck-are-we-in-the-economic-cycle-anyway-the-answer-is-important-in-deciding-what-sectors-to-overweight/ )

See any sector that those two stages have in common? So why not overweight energy right now? several readers asked. That way your portfolio can catch the sector’s outperformance at the end of the early recovery stage and the sector’s outperformance in the first part of the late recovery stage.

That’s an excellent idea. Just be careful what energy stock you pick. The sector is a little tricky to navigate right now. I’d favor being very selective on oil stocks—most of the international majors aren’t all that attractive currently. I’d favor oil equipment and service companies right now and small oil producers that are growing production and that look like acquisition candidates over the oil majors.

And I’m going to end this post with five picks of exactly those sorts. Read more

My two conclusions from the Ensco (ESV) bid to buy Price International (PDE).

First, the Deepwater Horizon disaster in the Gulf of Mexico has put a big premium on owning the newest deep-water drilling rigs. Read more

Sell Transocean (RIG)

Sometimes it doesn’t pay to be the biggest.

If you’re the biggest company in the market and control capacity in your industry, that’s a license to print money when supply for your product is tight. When supply runs ahead of demand, however, the pressure is on to support prices across your industry by reducing your capacity.

This is the story for Saudi Arabia, the swing producer in OPEC (Organization of Petroleum Exporting Countries). For Potash of Saskatchewan (POT) in potash fertilizer, and for Transocean (RIG) in the offshore drilling industry.

Transocean’s 139 drilling rigs give the company by far the biggest offshore drilling fleet. And that’s a huge advantage when supply is tight in the industry and Transocean can ride the ever-higher day rates for rigs to higher and higher profits.

Right now size isn’t exactly a blessing because Transocean’s huge fleet covers all the segments of the offshore drilling market.

Some segments are doing just great: deep and ultra-deep rigs are still in short-supply, even with the drilling moratorium in the Gulf of Mexico after the BP-Transocean-Halliburton Macondo disaster. Day-rates have pushed back over $600,000 and contracts have stretched out to 10 years or more.

But 65 of Transocean’s 139 rigs are jack-up rigs and the jack-up market is very, very, very soft. Read more