Oil Prices Boil Down to Geopolitics

If you're trying to figure out whether oil stocks are worth buying now, you're better off watching CNN than looking at things like proven oil reserves. That's because geopolitics more than macro economics are likely to influence the price of crude, and therefore the shares of companies in the oil sector.

From a macroeconomic analysis, oil-sector stocks are attractive because their valuation, asset base, cash flow and earnings are relatively more visible than those of companies in most other sectors. The geopolitics, however, are a wild card.

The joker in the deck is Saudia Arabia. One can imagine scenarios in which the kingdom becomes roiled in the back wash from the World Trade Center disaster. If that were to be the case, the price of crude will skyrocket and so will the shares of energy and power companies, especially of the domestic ones, as well as of "alternative oils" like tar sand and oil shale.

But there are other possible scenarios involving the Saudis and militant Islam, none of which are possible to predict. And because you can't structure a portfolio based on speculation about geopolitics, I would confine my longs in the sector to Phillips(P) and Unocal(UCL) because they are good values at these levels, and because if anything goes wrong with the oil-producing states, as companies whose assets are mostly in the U.S., their shares will appreciate disproportionately in relation to the international producers like BP Plc and Royal Dutch Petroleum(RD).

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