It's unseasonably warm here in Baltimore, and crude oil prices are unseasonably high. Futures are trading in an opposite trend to recent years, but oil services are following gleefully with the abnormal rally. Here's why.

Last week, my colleague Keith Kohl told you we're on the path to $100 a barrel for light, sweet crude. It's the benchmark of today's energy world, and it's squeezing companies and consumers with each new dollar breakthrough on the NYMEX.

Today, we broke $89, damn near a new 10-dollar psychological price resistance point. But this market isn't about psychology as much as simple geopolitics and geology.

With each new kidnapping of an oil worker in Nigeria (over 200 just this year) and every military incursion near an oil field (Turkey's pending campaign in Northern Iraq will put them within missile range of Kirkuk, Iraq's first oil discovery site), oil and gas service companies can charge more of a premium for their services, and justifiably so.

The 2005-2006 trend for oil prices ran downhill as the leaves turned, in sync with most years. But the current pattern is as vivid as the greens I still see outside my window, rising up, up, and away towards the century mark of a hundred bucks a barrel.



Along for the ride are oilfield service firms like Houston's Schlumberger Limited. For better (now) or worse (last year), these companies ebb and flow with the tide of Texas tea.

Here we see NYMEX front month futures for the past year, and below it the chart for Schlumberger, which trades as SLB on the NYSE.





Oil price dips early this year and again in August pulled SLB down with them, but just the same we see a steady upward swing in the company's stock each time black gold zips higher.

Same goes for NYSE:OIH, the HOLDRS oil services ETF, which includes Schlumberger as a component. Schlumberger has distanced itself from the pack, outperforming OIH by about 30% over the past year:

Nevertheless, the industry trend is still firm, and the OIH with its holdings like Halliburton and Baker Hughes is a broad-based way to play the energy industry kick that raw material prices lead to.

Now, we could say that oil services take the lead in this trend, with any service price increase for welding, pumping, and security taking its toll on the NYMEX floor.

That doesn't factor in the production declines we've seen across the board. The International Energy Agency's own data implies a 3 million bpd production capacity increase necessary to fill the gap left by dwindling supergiant fields like Saudi Arabia's Ghawar and Mexico's Cantarell.

This gets us back to the key prediction of Peak Oil theory: oil won't be gone altogether, but it will continue getting harder and more expensive to coax out of the ground, and the hydrocarbons that do come up will be of increasingly inferior quality.

So if Schlumberger is asked to drill deeper, why wouldn't they charge more? It's the same old correlation between labor and value that economists have modeled for centuries.

It falls to the investor to decide whether oil's current trajectory is already priced into OIH and other oil service industry meters.

As oil gets bid up, for any of the myriad reasons currently driving its price incline, service companies will be justified in asking for more money for themselves. And so we chase our tails, but we can pad our pocketbooks along the way if we know how to play it.

Regards,

Sam Hopkins