Market Beat: Oil spikes and the economy
September 5, 2013
The situation in Syria has the potential to explode into a regional conflict. The Assad regime has been accused of chemical attacks against its own people, and it looks like the United States might respond with a military strike once Congress returns from recess.
President Obama announced over the weekend that he'll seek congressional approval prior to authorizing an attack. Hopefully the international community will join forces and find a way to pressure Assad without escalating the violence.
Investors need to pay attention to global conflicts like this because they can cause the price of crude oil to rise dramatically, which can lead to recession and poor stock market performance. According to a recent article in Forbes, the recessions of 1973, 1980, 1991, 2001 and 2008 were caused in part by high oil prices.
During the next few days and weeks the news is likely to be full of reports from alarmists that the price of oil is about to spike and it will derail the global economy. Be careful about what you read because sensational stories tend to get a lot of attention.
Investors worried about the possibility of an oil price spike can consider owning some oil stocks or oil based ETFs in their portfolio. Blue chip US oil stocks like Chevron and Exxon-Mobil can increase in price as the price of oil rises.
There are several ETFs, or exchange traded funds, that can give an investor commodity exposure to crude oil as well. The price of oil can be very volatile and it is possible that the price of oil could fall rapidly once the situation in the Middle East stabilizes.
Owning an oil-based exchange traded fund may not be suitable for all investors due to the volatility. Another approach is to use an options strategy to hedge a portfolio against an oil spike.
It will be interesting to see what happens over the next few weeks as the congressional debates on military action in Syria begin. It may be a good time to consider what could happen to your portfolio if the price of oil does spike.
Hopefully, the conflict will be resolved without an escalation of the violence. U.S. energy production is growing rapidly and we get closer to energy independence every day. It won't be long before domestic oil, natural gas and alternative energy production take care of all of our needs.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information on his money management service can be found at his blog at http://www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.