Why there's talk of $120 a barrel oil, maybe even $150--and three stocks to take advantage of that possibility

02/24/2012 12:48 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Oil week has just ended in London.

This year International Petroleum Week, the annual gathering of the oil industry, has been dominated by just one topic: Iran. And the talk focused not on the potential for war but on the consequences of the sanctions against Iran that have already been put in place.

From what I can judge from reports from the events that ended Wednesday night—my invite to the closing black-tie dinner seems to have been lost in the mail again—oil traders think that the sanctions against Iran will require the country to find new customers for 750,000 barrels of oil a day. That’s about a third of Iran’s daily exports last year. Traders see some prospects for Iran making up some of the slack from customers such as India, but the consensus is that there simply isn’t enough demand from new customers for Iranian oil and the Iranian industry is looking at production shutdowns.

Which, of course, leads to oil trader’s favorite sport—speculating on the price of oil.

The view was that Saudi Arabia can replace lost Iranian oil but only by going from currently pumping 10 million barrels a day to pumping 11 million barrels a day. At 10 million barrels a day the Saudis are pumping at the highest rate in a decade. Pumping 11 million barrels a day would basically leave the Saudi industry with no spare capacity at all.

Which will be a problem this summer when rising temperatures in the country normally create an increase in air conditioner use and a spike in electricity demand that eats up part of Saudi oil production.

And which will be an even bigger problem if another oil producer—say Southern Sudan, or Syria, or Yemen--runs into production problems as now looks likely.

That supply tightness is why International Petroleum Week ended with talk of $120 and even $150 a barrel for West Texas Intermediate oil. (Brent, the European benchmark, closed February 23, at $125 a barrel. West Texas Intermediate, the U.S. benchmark, finished the day at $107.)

Oil prices at those projected levels aren’t good for global economic growth and would come down especially hard on European economies that look likely to slip into a recession with a second straight quarter of negative growth for the first quarter of 2012.

For investors, I think oil prices at those levels will keep recent momentum going in the oil drilling and service sector in anticipation of higher oil company spending as a result of higher oil prices. My three favorites in the sector are Schlumberger (SLB),  Ensco (ESV) and National Oilwell Varco (NOV).

Full disclosure: I don’t own shares of any of the companies mentioned in this post 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 December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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