In case you haven’t heard yet, oil prices spiked more than $5 per barrel late Tuesday on rumors that Iran had fired shots at U.S. warships. Although the gains were pared once the news went unconfirmed, one only needs to imagine what would happen if heightened geopolitical actions were indeed reality. In such an environment, energy stocks will serve as a hedge for your portfolio and as a result, avoiding them is not advisable given the global political situation we currently find ourselves living in.
The energy sector represents 10% of the market cap of the S&P 500, so it isn’t difficult to determine if you are dramatically underweight these stocks or not. When you couple shrinking global supply with increasing demand worldwide and geopolitical instability, it’s pretty hard to make the case that oil prices are headed back to $30 per barrel. Add in the fact that the summer driving season is right around the corner and it’s not hard to imagine gasoline back over $3 per gallon and oil prices back in the 70’s.
Investors can play the group via the crude oil exchange traded fund (symbol USO) or any number of exploration and production companies. As for individual stocks though, if you want to get exposure to rising oil prices, make sure the company you buy doesn’t have a large amount of their future revenue hedged at lower prices. Such companies will likely see less movement than those who are mostly unhedged.