Oil Futures at $85 a Barrel? Not for Long

Politics and stocks -- rarely a winning combination. The former makes the latter even more unpredictable, and nowhere is the tie between a company's stock performance and global political and economic maneuvering more clearly defined than in the world of big oil. But in this particular instance, investors can find opportunities -- serious opportunities -- in a downtrodden sector that could very well be on the verge of heading north, in spite of near-term indications.

How we got here
The days of $100-plus per WTI barrel -- and the positive impact that had on industry bellwethers ExxonMobil (NYS: XOM) and $203 billion Chevron (NYS: CVX) , let alone "little" guys like $126 billion BP (NYS: BP) and $69 billion ConocoPhillips (NYS: COP) -- have gone by the wayside. The increase in domestic oil reserves along with up-and-down economic data here and abroad are largely to blame. Though lower gas prices around the country have been great for consumers and helped to keep inflation in check, shareholders of the aforementioned companies aren't enjoying the change quite as much.

Perhaps not quite as well-known -- but also a key driver in keeping oil prices low -- has been the Saudis' production output the past couple of months. At 10.5 million barrels a day, Saudi Arabia is cranking out crude faster than it has in 30 years, and the excess is actually above OPEC's target of 30 million barrels daily. The line of reasoning was to bring the prices down to a more manageable level as the global economy struggled. It worked, and oil stocks have taken it on the chin as a result.

The upside cometh
As is often the case for mid- to long-term investors, there's light at the end of this particular tunnel. There are several factors coming into play that will impact oil prices -- and, by extension, oil company stock prices -- not the least of which is the embargo on Iranian oil that recently kicked in. As the Saudis have shown, embargo or no embargo, cranking up the dial on production is no big deal in and of itself, and they may continue to do so in the immediate future. However, that's not likely to continue indefinitely, for a couple of reasons. Right now Saudi Arabia is saying lower oil prices are needed in a struggling global economy, and they're right. But assuming normal seasonal oil price adjustments in Q3 kick in, inventories level off, and the impact of the Iran embargo takes hold of world markets, then oil prices will begin to rise.

The second quarter is historically the lowest-demand season for oil. But as we head into Q3 and beyond, oil prices usually increase based on the summer driving season and the following fall and winter months. And should Saudi Arabia determine they've done their part and take the foot off the production pedal, which wouldn't be the first time, that move could also drive the price higher. Will any of these scenarios happen tomorrow? Not likely, but as we head further into the summer, the prospects for price increases will grow stronger.

The options
The timing and the opportunities for investors to profit over the coming months in oil stocks is absolutely ideal. But which stock has the most upside? Though ExxonMobil is trading at the highest multiple of the bunch, it offers a slight twist the others don't; in addition to being the oil industry behemoth it's become, it is also a huge producer of natural gas. And with indications of a slowly improving natural gas market, ExxonMobil becomes an intriguing play. For the more conservative investor, Chevron is a sound option. Based on current multiples, at 7.6 times earnings, it's in the lower middle of the industry cost-wise and pays a solid 3.5% dividend. It's a solid selection for the investor in search of conservative growth and a decent income stream.

Though ConocoPhillips may look attractive for value hunters -- and it will certainly see some gains like the industry as a whole -- Conoco hasn't provided shareholders with the kind of results others have. Both revenue and profit were down compared to Q1 of 2011. Cheap as it is, there are better options.

One of the best options in the sector is BP. Along with a 5% dividend, which is one of the best in the industry, BP is currently trading at just over five times earnings. The company has enjoyed quarter-over-quarter operating cash flow growth, and is sitting on $14.6 billion in cash. Granted, while Q2 won't look as good compared to 2011 because of the easing in oil prices, Q1 revenue obliterated the prior year's quarter, jumping about 11%. Margins did take a hit based on significantly higher expenses in the quarter, but all that's done is make the share price that much more attractive going forward.

The recent lowering of prices at the pump has been nice, no doubt about it. Unfortunately, cheaper gas isn't going to last much longer, and that could be a bit depressing as you hit the road this summer. Want to ease the pain? Add BP to your portfolio, sit bac,k and enjoy the ride.

Don't want to confine yourself to just one oil stock? Finding the right ETF to profit from the pending rise in oil prices may be the answer. Learn how to pare down your risk and potentially improve your profits with our special free report: "3 ETFs Set to Soar During the Recovery."

At the time thisarticle was published Fool contributor Tim Brugger currently holds no securities positions, including any mentioned in this article. Motley Fool newsletter services have recommended buying shares of Chevron. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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