Is Oil About to Spike Again?
The recent attack on Syria by U.S. and ally forces has raised the prospect of another major spike in oil prices, according to JPMorgan Chase & Co. Oil, already at more than three-year highs, could be poised for another 10% gain in the short term.
JPMorgan’s New Outlook
The U.S. multinational investment bank recently issued a forecast calling for $80 a barrel oil, citing an expanding presence of Western forces inside Syria as well as the threat of new sanctions on Iran, a major oil-producing nation. Brent crude, the international futures contract , closed at $72.58 a barrel on Friday for a weekly gain of 8.2%. A price point of $80 a barrel would put Brent at roughly 70% of mid-2014 levels.
U.S. counterpart West Texas Intermediate (WTI) rose 8.6% during the course of the week to settle at $67.39 a barrel.
“Risks we thought might materialize this summer through Iran sanctions are emerging somewhat more quickly due to events in Syria,” JPMorgan strategists led by John Normand wrote on Friday.
U.S., British and French missiles pounded Syrian targets early Saturday in response to an alleged chemical weapons attack carried out last weekend. U.S. President Donald Trump declared “Mission accomplished” shortly after the blitz, which included 105 missile strikes fired on three targets.
While it is unclear what the response will be once markets reopen on Monday, the Trump administration has indicated the missile strikes were not a recurring event. That said, Washington’s ambassador to the United Nations Nikki Haley said the U.S. forces are “locked and loaded” to carry future attacks if the Syrian government uses chemical weapons again.
Syria and Russia have both denied that a regime-led chemical weapons attack took place and no conclusive evidence has been brought forward on the matter.
The Case for Commodities
JPMorgan analysts aren’t the first to declare commodities a good investment at this stage of the business cycle. Strategists at Morgan Stanley have noted that energy stocks have historically been a “very consistent late-cycle outperformer,” which puts them on firm footing to beat the weakening bull market.
The energy sector has rebounded sharply from the multi-year downtrend in oil prices, but has severely underperformed the S&P 500 Index this past year. The $3.8 trillion worth of energy stocks represented on the S&P 500 have gained a mere 1.7% over the past 12 months, compared with a 13.3% return for the broader index.
Commodities like crude oil and gold are also benefiting from a weak U.S. dollar. The closely-watched dollar index (DXY), which tracks the greenback’s performance against a basket of six currencies, is down 2.5% this year. The dollar posted negative returns in 2017 and in January was off to the worst start to a year in over three decades.
In addition to energy stocks, the following oil-related portfolio recommendations were put forward by JPMorgan:
- Long WTI call spread
- Long Brent calendar spread
- Overweight the S&P 500 Energy Index
- High-yield energy credit
- U.S. versus euro five-year inflation-linked bonds
- Long Canadian dollar versus Japanese yen
However, gold may be the more attractive bet over the long term as geopolitical risks and rising U.S. shale production squeeze oil prices. Even the strategist at JPMorgan said the $80 a barrel price point would likely only be good for three-to-six months before U.S. producers flood the market again. As we’ve mentioned before, U.S. crude producers can make profits with prices as low as $40.
The current risk-off environment could also boost the appeal of cryptocurrencies, which are said to offer store-of-value characteristics. It has been argued that volatility and ‘FUD’ (fear, uncertainty and doubt) have masked the intrinsic value of crypto assets during the latest downtrend. Given that the underlying fundamentals have only changed for the better, a more sustained rally in crypto assets could strengthen portfolios struggling with the late-cycle blues.
Featured image courtesy of Shutterstock.