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

Buy GulfMark Offshore (GLF)

Suddenly they’re hitting gushers from the Gulf of Mexico to the South Atlantic off Brazil to the west coast of Africa off Ghana and Sierra Leone.

The oil from these finds will eventually become critical to global supply—once the global economic downturn is over. The downturn has brought us what the International Energy Agency projects will be a two year slump in demand. If the global economy recovers relatively quickly, the agency projects, we could be facing another supply squeeze by 2014.

But these finds themselves look like their end another oil industry slump well before that. Deep water exploration suddenly seems to be headed to a boom. And that means we’re likely to see rigs coming out of cold stacking and starting to earn day fees again well before 2011, the year that many analysts had picked for a turn in the drilling industry.

In other words, the way to play these big deep water discoveries now is by buying shares in the drilling companies most likely to profit from an earlier turn in the sector’s fortunes. Read more