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Profiting from the oil spike

February 24th, 2011 · No Comments

The odds are still on that this is temporary..
We’re concerned, but still not overly worried. There is a simple logic at work here:

  • Sooner or later, Libya will sort itself out, no party dominating after the uprising has an interest in cutting oil supplies to the world, unless that party is some extreme Muslim fundamentalist one (and even they need money), which is not likely to happen (although, read here).
  • The same logic can be applied to possible uprisings elsewhere in oil exporters
  • If installations become damaged, the cutbacks in supplies could last longer though, although this is only really likely in a civil war like scenario (which is why oil has spiked this morning as Libya might descend into one).
  • If high oil prices start to dent world economic growth, this is a self-correcting mechanism with oil demand tapering off. This is a rather slow feedback mechanism that will do a lot of damage (especially to countries with troubled public finances), so this is our main worry.
  • The trouble in the major energy producing location in the world is likely to accelerate development of energy resources in other, more safer parts of the world (and alternative energy).

So, spikes are very likely but, at the first sign of stability, oil will fall back (albeit incorporating a greater risk premium for future disruptions).

You can play the spikes with oil futures, volatility measures like VIX futures, VXX, and the like. You can buy insurance buying call options on volatility measures and short them on spikes.

Energy investments, unless they have direct and major exposure to troubled areas, will likely benefit. That holds for our main gas and liquids play InterOil as well.

Tags: Opinion · The Markets