Submitted by Dailygains Letter as part of our
If investing is about taking advantage of opportunities, oil
might be one of the best plays right now.
According to the International Energy Agency, the three most
common reasons for disruptions in the global oil supply are
technical problems (check), civil unrest (check), and seasonal
storms (check the 2013 Atlantic hurricane season is in full swing
until the end of November). (Source: "How does the IEA respond to
major disruptions in the supply of oil?," International Energy
Agency web site, last accessed August 29, 2013.)
Between Thursday, August 22 and Wednesday, August 28, the price
of crude oil climbed five percent to a two-year high. Over the last
two months, the price of crude oil has surged more than 17% on the
heels of tighter supply due to disruptions in the North Sea and
data out of China and the
, and rising tension in Syria.
Now granted, Syria isn't an oil powerhouse: its current daily
output is less than 50,000 barrels a day (a significant decrease
from 350,000 barrels in March), but that's just a drop in the
bucket compared to the global output of 90 million barrels a
The real threat to the price of oil is a result of political
jockeying. While the U.S. and its allies are considering a launch
against Syria in response to its use of banned deadly chemical
weapons on its civilians, China and Russia have weighed in, saying
that would lead to "catastrophic consequences."
Iran, of course, said any strike against Syria would lead to
retaliation on Israel. Israel, for its part, said it was ready to
respond in strength to any attempts to harm it. Needless to say, an
attack and/or preemptive strike in the Middle East would wreak
havoc on global oil and gas prices; even so-called "limited
attacks" would put the Middle East on tenterhooks.
According to Societe Generale, the price of Brent crude oil
could touch $150.00 per barrel if the conflict in Syria spreads to
the rest of the Middle East and barrel shipments are disrupted.
So, does the spot price of oil or the oil companies themselves
offer investors the best return?
For example, say (hypothetically) that it takes $40.00 to remove
one barrel of oil from the ground; if it sells for $110.00, an oil
company's profit is $70.00. If oil prices shoot up to $150.00, a
senior oil company like Exxon Mobil Corporation (NYSE/XOM) would
make $110.00 per barrel.
But if you invest in an exchange-traded fund (
) that follows the spot price of oil, like United States Oil
(NYSEArca/USO), you are not getting the leverage return?you are
simply following the spot prices.
There is a risk/reward trade-off, of course; between oil
companies and the spot price of oil, the latter tends to be less
volatile or risky. That said, on the cusp of a potential war in the
Middle East, oil companies could experience the greatest gains.
This is why an ETF like Energy Select Sector SPDR (NYSEArca/XLE)
might be an interesting play. Instead of following the spot price
of oil, this ETF is made up of 45 different oil companies. The
fund's top holding is Exxon (16.17%), followed by Chevron
Corporation (NYSE/CVX) at 14.60% and Schlumberger Limited
(NYSE/SLB) at seven percent. (Source: "Energy Select Sector SPDR
Fund, Holdings," SPDR.com, last accessed August 29, 2013.)
Interestingly, as fears in the Middle East send oil prices
higher, Canada is beginning to look a lot more like an energy safe
haven. One of the best ways to take advantage of Canadian oil
companies is with the iShares S&P/TSX Capped Energy Index
(TSX/XEG). Canada's oil sands have become an attractive option for
countries like China, so any ongoing conflict in the Middle East
could make Canada a hotbed for other countries in search of oil in
a politically stable region.
This article Have Conflicts in Syria Made Oil a Great
Short-Term Play? was originally published by