News

Key Points

• Geopolitical conflicts are forcing oil prices higher.

• Oil stocks with domestic production face less risk of volume disruptions.

For years, Warren Buffett has continued to pile into one popular U.S.-based oil stock. That oil stock now comprises roughly 4% of Berkshire Hathaway's entire publicly traded portfolio. Now that oil prices are surging, this classic Buffett stock looks more promising than ever. That's especially the case given the company now has a strong advantage versus dozens of competing oil stocks.

Occidental Petroleum produces a majority of its oil in the U.S.

Occidental Petroleum (NYSE: OXY) is clearly one of Warren Buffett's favorite oil stocks right now. Before he departed as CEO of Berkshire Hathaway in December, he left the firm with a $10.9 billion position in Occidental Petroleum -- a bet that has gradually risen in value since his first purchase in 2022.

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When Buffett first invested in OXY stock in 2019, oil prices were around $50 to $60 per barrel.At the start of this year, oil prices remained below $60 per barrel.

Due to recent geopolitical tensions, however, oil prices are surging once again, briefly surpassing $115 per barrel, only to settle at roughly $80 per barrel within a few days. Some analysts believe $100 per barrel pricing may be ahead yet again -- a big win for upstream oil companies that rely on rising prices to boost profits.

A global domino effect is now happening due to current and expected oil production disruptions across the Middle East. China, for example, recently banned its refineries from exporting any refined fuel. The Strait of Hormuz, meanwhile -- a major chokepoint that processes 20% of global oil transportation -- faces severe uncertainty regarding its safety.

While oil prices have surged in recent weeks, the stock prices for many oil producers haven't followed suit as strongly. Chevron stock, for example, is up just 6% over the past month versus a 24% rise for oil prices overall. Occidental Petroleum shares, however, are up 18% in value over the same time period -- three times the movement of Chevron stock.

Much of this has to do with Chevron's diversified, integrated business model. Occidental's upstream focus is simply more leveraged to rising oil prices. But each company's geographic exposure likely also plays a factor. Occidental produces more than 80% of its oil and gas in the U.S., far from the current geopolitical challenges. Chevron, on the other hand, produces roughly 50% of its oil and gas in the U.S., with strong exposure to politically unstable areas like Venezuela and the Middle East.

Warren Buffett's investment in Occidental Petroleum likely wasn't based solely on the company's domestic exposure. But in times of geopolitical upheaval, the company arguably faces much less uncertainty than rival oil stocks. That should keep volume growth positive and steady, resulting in positive demand growth for its production throughout rising oil prices -- a win-win for investors.

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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.