Why in heaven's name can't the oil-heavy nations go reinvest their winnings and start exploring and drilling again?
The biggest quandary about the oil market isn't about what's happening right now -- skyrocketing prices with no lid in sight. It's what's going to happen versus what should be happening.
We all know the OPEC litany of woes these days: Venezuela crumbling, Libya falling apart, Iranian strife, other nations tapped out. It seems as if only Saudi Arabia has a longer-term vision of what to do, and that's to diversify away from carbon fuels -- something it is indeed doing with alacrity.
But what's truly amazing to me is that by this point, the oil service companies, companies like Schlumberger (SLB) , Core Labs (CLB) and Halliburton (HAL) should have their phones ringing off the hook from the OPEC countries and any other country with some reserves, any reserves.
Just like there seemed to be no bottom when oil was at $26, it does feel like there's no top in the $70s. The difference is that these major countries were still spending money like mad men a year into the downturn. But then they shut down completely when oil didn't come right back to the $50s and instead labored in the $40s for what seemed like ages.
Now that oil has blown through the $60s, though, they, for the most part, haven't increased their exploration budgets at all. Some, like Venezuela, have all but stopped exploring altogether -- even as it has the largest reserves in the world.
That's why right now it is tough to fight the oil tape, the one that wants to go higher even if our President doesn't want it to.
Yes, I believe the Saudis could pump another million barrels a day to make it so oil doesn't continue to shoot higher. Now that we are hearing as of last night, according to the Wall Street Journal that the Saudi Aramco deal may not be a go, they can afford to accede to Trump and raise production. They wanted oil as high as possible to make that IPO pop.
But the bigger issue is how can these oil-rich countries be so poorly run that they don't see the need to start spending to find the new fields that are indeed out there? There's virtually no new deepwater exploration going on around the world now. Yet if you believe these prices, and I think they are believable, that's precisely what should be happening.
Unless it does start happening, these countries will be depleted to the point where they will not be able to take advantage of the higher prices. It's almost as if they forgot that you have to invest in order to profit. Otherwise you just run out.
We often focus on the exploration budgets for the majors. But they are nothing like what a country can do. Take Mexico. It should be out there spending billions to discover new oil in the gulf. Instead, it is doing next to nothing to replenish. Venezuela looks like a lost cause. Bizarrely, given how poorly managed Brazil's economy is, this is the one country that seems to recognize that the time is right to explore and spend.
It's about time, of course, as Brazil cut oil spending to the bone in the downturn. But now it's opening up exploration of what some oil experts believe to be more than 13 billion barrels of reserves.
But Brazil is not enough. Nor is the U.S. -- where our companies are drilling as fast as they can, but they can't bring it all to market because of a pipeline shortage. If oil is going to stop climbing there must be an increase in the exploration budgets of all of the major national producers.
That's why I don't think it is too late to buy the stocks of oil companies that are spending to find more petroleum, as they are the big winners in the absence of national exploration. But I also think by the end of this year the big producing nations will come to their senses, which is why I think you can buy the service companies, too. I regard buying Schlumberger, the best of the best, with a 3% yield and a tremendous balance sheet, as a much less risky thing to do than buying a smoking hot producer. We are telling members of the actionalertsplus.com club that it's the best value in the group. SLB is an Action Alerts PLUS holding.
A barbell of service companies, betting these nations come to their senses, and producers, makes a ton of sense here. I'd do 'em both right here and let 'em ride.