Daily Gains Letter

Have Conflicts in Syria Made Oil a Great Short-Term Play?

By for Daily Gains Letter |

Have Conflicts in Syria Made Oil a Great Short-Term Play?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 Libya, positive economic data out of China and the eurozone, and rising tension in Syria.

Light Crude Oil Chart

Chart courtesy of www.StockCharts.com

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 day.

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 (ETF) 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.

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