Oil made two runs toward $150 recently, and failed both times. Now oil is in a retreat. Oil was trading near $121 earlier this week. And it appears that support at that price is crumbling. This will surely take the oil company stocks down, as well as those of the oil service companies.

Despite this recent drop in oil prices, BP (BP: NYSE) reported a 28% increase in second-quarter profits, led by surging energy prices. BP also announced that it would continue to fight for its interests in its troubled Russian partnership, TNK-BP. All of this bodes well for the tenure of CEO Tony Hayward and his efforts to get more out of BP than his predecessor John Browne.

Don’t panic if oil falls and the oil stocks follow. Depending on where you got into the oil run-up, you ought to be sitting on some nice gains. If you have gains, don’t be shy about selling a portion of your shares and taking the gains off the table. Build up some cash reserves for other opportunities.

Long term, over the next three-five years and longer, the price of oil is headed back up. So keep an eye out for any bargains in the oil patch and nibble. Don’t feel compelled to spend down all your cash just because a stock has a bad day. In this market, there will be more bad days ahead. So be patient and careful.

Meanwhile, don’t be afraid to take advantage of any oil declines to build your positions in great companies like Halliburton (HAL: NYSE) or Baker Hughes (BHI: NYSE).

Where Is Oil Headed?

Even Hugo Chavez of Venezuela conceded an important point last week. Chavez said that the price of oil ought to be about $100 per barrel. Hmmm… What does Hugo Chavez know, and when did he know it?

So will oil back down to $100? That’s a definite “maybe.” The supply-and-demand fundamentals point to an oil retreat in the short term. But then again, oil is a traders’ commodity. The slightest bad news can spike the price.

A senior official at Russia’s Gazprom (LON:GAZP) predicted not long ago that he expected oil to sell for $250 per barrel in “the near future.” How near? He did not give an exact date. Then again, was this just a case of the Russians “talking their book”?

So in the short term — the next few months — oil OUGHT to go down in price. But there are many things (hurricanes, accidents, war) that could spike the price. But don’t worry, I watch the events and trends every day – I’ll keep you in the loop.

Until we meet again,

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Source: Where Is Oil Headed?